On-Demand Music Streaming to battle Piracy

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On-demand music streaming services is creating a paradigm shift in the music industry. The revenue from the worldwide retail sales of recorded music was just shy of $22 billion, with the revenue from digital platforms roughly a billion more than that from physical platforms. On-demand music streaming services have been gaining popularity owing to the fact that smartphone penetration has reached over 50% in developed markets and about 20% in emerging markets. This, coupled with the availability high-speed Internet services is causing the entire value chain of the music industry to be restructured.

In the music production value chain, an artist becomes commercial when signed by a record label, which uses its resources to produce and market the artist’s music. The record label takes care of copyright, licensing deals, marketing and promotion. Traditionally, produced music was handed down for manufacturing and distribution on platforms ranging from Vinyl records to cassettes and CD/DVDs. The growth of the Internet coupled with the discovery and standardization of compressed digital audio formats turned out to be disruptive for this portion of the value chain. Research that led to the development of the most popular compressed audio format – the Mp3 (MPEG Audio Layer III) was started in 1987 at the Fraunhofer Institut in Germany following which the Moving Picture Experts Group or MPEG was established as a subcommittee to standardize the format that led to Intellectual Property becoming a commodity over which some of Internets greatest wars would be fought.

Karlheinz Brandenburg, a German electric engineer and mathematician, is regarded as the father of the Mp3 format for his contributions to the development of Mp3, ranging from basic research to market release. In 1989, Fraunhofer Institute of Digital Media and Technology received a German patent for MP3 and in 1996, the first US patent was issued for MP3. Fraunhofer joined hands with Thomson Multimedia (also known as RCA) to create a joint portfolio of 18 patents covering all aspects of the MP3 format. A list of these patents, the royalty rates for licensing them and a list of licensed companies can be found on Mp3licensing.com, a licensing service provided by Fraunhofer IIS and Technicolor.

After Fraunhofer started enforcing its patent rights in 1998, all developers of MP3 encoders or rippers and decoders or players had to pay a licensing fee to Fraunhofer. By 1999, a record company called SubPop started distributing music tracks in the MP3 format and everyone jumped on the bandwagon. The advent of portable MP3 players and smartphones just increased the popularity of the format. This change was very disruptive since it made many traditional brick and mortar business in the music industry run out of business since they were out-dated. Manufacturing and distribution was no longer done over physical mediums such as cassettes and CDs but over digital formats, which were distributed over the web and played on devices such as smartphones and music players. It also led to a massive outbreak in piracy, which left both artists and record labels baffled over the issue of regulating the outbreak of pirated music on the web.

With peer-to-peer (P2P) networking tools flooding the market and enabling the easy distribution of pirated content, big record companies such as EMI, BMG and Warner Bros. Records along with artists worldwide began to raise a concern. This led to the development of the Open Music Model in 2002, an economic and technological framework for the recording industry based on research conducted at MIT. The model predicted that owing to the paradigm shift, the playback of pre-recorded music would be regarded as a service rather than as an individual product. It proposed that the only system for digital distribution of music that will be viable against piracy is a subscription-based system that supports file sharing and is free of digital rights management. The research also indicated that $9 per month for unlimited use would be the best market-clearing price for this service. Since its creation in 2002, a number of its principles have been adopted throughout the recording industry, and it has been used as the basis for the business models for many emerging music subscription the services.

The first commercial music subscription service was launched by Rhapsody in December 2001 and it offered unlimited access to a large library of digital music stored in the cloud which could be accessed for a flat monthly fee. This was followed by the launch of the iTunes store in 2003, Pandora in 2005 and Spotify in 2008. In the present market, there is a plethora of on demand music services such as Rdio, Spotify, SoundCloud and Tidal to name a few. Even Apple decided to follow suit this year by scrapping the iTunes music store and replacing it with its own streaming music service “Apple Music”. As the market gets competitive, few factors that are playing a critical role in shaping a customer’s choice are – the devices and geographical regions supported by the service, the size of the library which is controlled by the number of licenses acquired by the service, the quality of curated playlists provided by the service, social media interfaces, quality of the sound, availability of offline mode, and pricing.

In order to start a successful on-demand music streaming service, service providers need to create a very engaging user experience. They key ingredients to this is a cutting edge technology platform that enables users to seamlessly access content from remote servers which host extensive libraries of licensed music content. The licensing part typically involves negotiations with Record Labels, both Major and Independent and with Music Publishing Companies. Record labels are generally responsible for developing the artist, working with producers, paying for/arranging studio time, mixing, mastering, graphics, packaging, distribution, and marketing. Music Publishing Companies are responsible for ensuring that the songwriters and composers receive payment when their compositions are used commercially. This part of the music business has to do with IP rights related to copyright and trademark. On-demand music streaming services also need to be concerned about patent rights while developing their unique technology platform that hosts and provides the service. There are backend patents on techniques such as server hosting techniques, content management, load balancing etc. and front end patents on techniques such as playlist generation, auto-play suggestion, user experience etc.

Who has the strongest portfolio?

music2Of the 57 patent families identified as seminal, or strong in light of providing on-demand music streaming, Yamaha Corporation holds the major share with 39%. By holding 22 patent families seminal to streaming music in its portfolio of 2,500 odd patent families related to music, Yamaha is well covered in areas such as content management, distribution, servers, service architecture and peripheral support. It is closely followed by Sony, which holds 32% of the share with 18 seminal patent families in a portfolio of 870 patent families related to music. Sony’s patents on streaming music cover areas such as processing, selection, distribution and playing of the media content on different devices. Beats Electronics, now a subsidiary of Apple Inc., holds six patent families that are seminal and accounts for its 10% share.

One of the synergies resulting from Apple’s acquisition of Beats is a portfolio covering areas such as building libraries, searching and indexing, generating playlists and content distribution. It is not surprising since there was no other patent family seminal to on-demand music streaming in Apple’s portfolio of 300 odd patent families related to music. Microsoft Corporation also holds five seminal patent families in a portfolio of 270 patent families related to music accounting for its share of 9% in the group. Microsoft’s 9% share of seminal patents covers playback and media control technology.

10% share of the seminal patents is held by the following six companies with one patent family each pertaining to areas specific to the company’s business model. The companies include Pandora, SoundCloud, Shazam, Google, Spotify, and Facebook. Pandora’s seminal patent family consists of patent applications in US and Europe having priority in 1999 covering the core technology behind its internet radio and broadcast method. SoundCloud holds a seminal patent family consisting of applications on content selection based on consumer interaction. Shazam’s seminal patent family consists of applications and granted patents having priority in 2000 and covering areas such as identifying sound signals to recognize music and purchase it online covers its core business model. Google has a seminal patent family covering areas such as triggering music answer boxes in search queries and playing audio announcements before tracks in a playlist. Facebook’s seminal patent family covers a method for integrating streaming music services into a social network. Spotify holds a seminal family which covers the feature of obtaining feedback for music recommendation.

Comparison of various services available today

Based on information publicly available on the Internet, 12 of the most popular streaming music services were compared in terms of the number of subscribed users and number of tracks available. SoundCloud, a global online audio distribution platform based in Berlin, is the leader in terms of number of users (175 million as of December 2014). This is because SoundCloud provides the most popular platform for budding artists and musicians to record, upload, promote and share their originally created sounds online. Most of the commercially available platforms such as Rhapsody, Rdio, Spotify, Deezer and Apple Music are still building their user base but have the largest library of licensed music at present with roughly 35 million tracks already under their belt. While many factors are influencing users to choose a particular service, it will be interesting to see which one finally spans out to become the clear market leader.

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The annual recorded music revenue figures released by the Recording Industry Association of America (RIAA) show that revenue from on-demand music services and digital radio went up when CD sales went down and ringtone revenues evaporated. Sales of download on platforms such as iTunes and Amazon MP3 have declined sharply. The revenue from the on-demand category comes from two major streams: paid/premium services and ad-supported/freemium services. Growth has been observed in the revenue from on-demand since the launch of Spotify’s ad supported “freemium” service and Youtube’s licensed on-demand service in 2011. With the revenue from on-demand services in the US crossing a billion dollars in 2014 and more players entering the market and redefining their services, it will be interesting to watch if any of the big players who hold seminal patents begin to exercise their rights.

(Featured image source: https://www.flickr.com/photos/111692634@N04/18060892884)

Gautham Somraj Koorma
Gautham Somraj Koorma

Gautham is a technical consultant in patent litigations and IP monetization activities. He consults Fortune 500 tech companies and major US law firms on patent litigation, IP monetization strategies, patent analytics and intellectual asset management.


2 Comments

  1. A well written chronicle of evolution of the músic industry. The era of streaming músic is becoming more evident with the technological advancements improving human life.

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