Virgin President Zack Zalon on Digital Music

BetaNews: As far as treating people online goes, there's always the issue of fair use and digital rights management. My understanding is that Virgin Digital music downloads are only licensed on the machine were the purchase was made. As far as DRM goes, how flexible is Virgin willing to be and is it willing to look beyond Microsoft and its Janus secure clock technology?

Zack Zalon: No music service controls the digital rights surrounding the music - even if we do have some flexibility in terms of the technology that we choose. It is the right holders, whether it is artists, publishers or record labels that actually are in control. What we do have is control over the technology to such a degree that we can provide an experience that over time, we think, will hide the ugliness of the DRM and bring a little bit more of an open experience to consumers.

That's gonna take a while and we are not alone in that desire. DRM wise, Microsoft happens to have what we think is the best and most flexible digital rights technology. If there's another one that comes out that we think is stronger, more reliable and even more entertaining for customers to use, we would be happy to adopt that as well.

Part of the problem with digital rights management right now is that people are not spending enough time focusing on seamless synchronization, and so what that does is exposes the issues around digital rights instead of hiding them in the background where they belong. We've spent a considerable amount of time on a suite of synchronization support technologies and device support technologies that we call Device IQ.

Device IQ is almost a philosophy for us in that the goal is to create an experience between software and hardware that is simple enough so consumers never realize that the DRM is there. And that becomes increasingly more important over time as Janus exists, but it's still very important now as people are encoding their own CDs into libraries and buying a tremendous number of songs through the 99-cent per song system. Getting it onto a device is something that we feel is very important.

We look at a company like Apple and feel that they have done a very good job in creating a holistic experience between software and hardware that is really easy for consumers to understand. But there are so many other MP3 players that are coming out now from a variety of different manufacturers, some of which are excellent. For those products that don't have the kind of software that has a holistic tie, that is what we are focusing on with Device IQ.

BetaNews: Some analysts project that subscription pricing is the way of the future. Which pricing model is superior?

Zack Zalon: They are two fundamentally different models. Some people believe that the ownership experience includes the ability to put it on a CD and for those customers an ala carte model is fine. But the truth is that when you articulate the value of a subscription service in its most basic way, which is we've taken 200,000 CDs -- an entire Virgin Megastore -- and we've digitized it for you, people suddenly start realizing "why do I need to take it onto a CD in the first place?" You can only carry 12 or 13 songs on a CD; the format itself is so limited that all you can do is enjoy a few songs at a time.

When you break it down to that most simple of explanations, generally music fans start to recognize the value of subscriptions. We are banking on subscription services as the foundation of the future as the way people are going to interact with their music. It's more exciting, it's a great way to explore new music, and it's a great way to listen to a variety of new musical formats without having to go out and spend thousands of dollars on a CD collection.

BN: Will Apple's iPod go the way of the Walkman and become commoditized?

Zalon: I think in the long run, Windows Media and MP3 players will become fairly ubiquitous as a digital entertainment delivery medium in the same regard that CDs have now. Ultimately you'll find MP3 players in almost every device from home stereo systems to DVD players to car entertainment systems and most importantly to cell phones.

At some point in the future almost every entertainment-based device that you interact with on a daily basis will be MP3 or Windows Media compatible. And part of the reason is because consumer love it; the other reason is because Microsoft is being very fair when it comes to their licensing terms to ensure that they achieve some sort of long term ubiquity. We like that concept.

BN: Will Virgin Digital be cross promoted with other brands or will there be a horizontal expansion of the Virgin Megastore onto the Web? For example when I buy a CD in a store, will I receive some sort of reward such as special content online from Virgin Digital?

Zalon: We can't talk about the specifics, because we haven't done our full launch yet. But what I can hint at is how important it is to speak directly to current Virgin customers first. The reason why is because Virgin customers buy more music than almost any other music customers in America.

In fact, that's true across the world wherever we have our Virgin Megastores. We only have 22 Virgin Megastores here in the U.S., but we have a disproportionate influence in terms of the music that they buy - we have over 35 million store visits a year by really passionate music fans. I think in not too long a period of time, a lot of that stuff will become pretty evident.

BN: There have been times when you have been accused of being outspoken. Let's add the human factor to this interview. Is there anything that you have got on your mind?

Zalon: From an outspoken standpoint it depends on what mood I am in.

BN: What mood are you in today?

Zalon: Very mellow man, very mellow. Okay, here's my off the cuff heartfelt thing: Digital music is great because it has reignited the passion around music that a lot of consumers tell us they feel they have lost over the past few years. The whole mentality around Top 40 flavor-of-the-week pop stars really started to squash the passion around new music and the enthusiasm that I really think had run the music industry for a long time.

Digital music has really given us a series of technologies and a new way of communicating directly with customers that was reignited not only for us as a company, but also in the customers that we want to speak to. This industry -- forgetting about who's playing it -- is really exciting. It's exciting for us, but it's also exciting for music fans. Whether they use our product or one of our competitors, we think that they are getting tremendous value.

In some respect, we don't really see that we are competing with some of our alternatives for consumers, but what we are really doing is lifting the industry up together. And that's what's really exciting for us because a rising tide lifts all boats and we believe in that strongly. This is going to be an extremely exciting few years not only for us, but for music fans in general. I think it will help the music industry over the long run in a pretty substantial way.

BN: There has been a lot of criticism that radio conglomerates like Clear Channel are just playing Top 40 and that DJs no longer have the freedom to help listeners discover new music. What are your feelings on that?

Zalon: I think radio actually serves a pretty good purpose, and, honestly, it still does drive about 90 percent of all new CD sales. So it plays a very important role in the music value chain.

But that said, what Internet-based technologies and digital music companies have allowed us to do, is to explore and experience new music in so many different ways that it just continues to increase the excitement around the music industry in general.

Ultimately, we think that radio will survive and that satellite radio will do very well and provide the right kind of entertainment to those customers who are really looking for it. The Internet is going to play a very significant role as well, in terms of offering customers the ability to access an almost unlimited number of new music experiences.

BN: Lastly, some record companies have been lobbying Apple to charge more for each individual download. Do you think that the 99 cent price point is fair?

Zalon: We believe that the pricing is fair where it is right now. It's the first pricing model that gives those heavily addicted to illegal peer-to-peer service a legal legitimate alternative. There are a lot of people that we know that have turned to legitimate music services because the pricing is low enough where they just don't feel that they are getting ripped off.

My concern is that in this nascent time in this particular industry, raising prices too much will throw people right back into the illegal services again and we'd like to participate in the opposite. But ultimately, the answer for it is subscription music services because the effective cost of the music goes down with each song that you listen to, and that is the most exciting aspect of what is going on in the digital music space.

BN: Thank you for your time Zack.