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Apple Helps Reinvent the Content Business

Just as surely as Apple didn’t reinvent cellular service with the introduction of the iPhone, it DID accelerate the changes taking place in the music business by the deal it announced today with EMI for the electronic distribution of music WITHOUT copy protection (aka DRM or digital rights management). 

Technology has always been a disintermediating force – bad for many formerly lucrative (and even formerly useful) middleperson businesses.  The march has been relentless from the Sears Roebuck catalog making a wider selection available “directly” at lower prices than local stores could ever hope to match, to national credit cards enabling money flow from consumers to non-local merchants, to 800 service providing distance-free access to national merchants; and has accelerated enormously with the consumer web.  Music is a leading edge because the content can be delivered as well as ordered online.

Four facts fell in place for the Apple-EMI announcement like tumblers in a combination lock:

  1. Compact disk sales account for 85% of music purchases.
  2. CD sales are down 20% year over year for the first three months of 2007. (source for above two numbers is The Wall Street Journal)
  3. EMI is only the world’s third largest music service (Reuters via the New York Times.)
  4. Largely due to the success of the iPod, Apple’s iTunes online music store has a 67% market share of online music sales which, in turn, account for 10% of all music sales (as of 7/30/2006 from USA Today).

In words instead of numbers, an enormous market is moving online.  Apple has accelerated that movement and owns the biggest pipe (without owning any pipes) between consumers and the content they are willing to pay for.  EMI, not the market leader, has reason to upset the cart (with apple) in a bid for greater share.  Bingo!  EMI is willing - perhaps has no choice - to gamble that increased sales of music which consumers can play on any device they want and can redistribute (although not legally!) will more than make up for lost sales due to illegal redistribution.

Make no mistake, this is an enormous gamble.  Music shared illegally is certainly already a greater “market” than music purchased legally.  Legal action against those who redistribute copyrighted material may deter those who do it for a business and somewhat discourage those who share among friends – but it has hardly stopped file sharing and is unlikely to.

The original owners of music – those who create it  - can use the Internet to distribute directly to consumers.  Those who are successfully promoted by the big labels will be able to use their fame to promote direct sales.  Those who the labels have declined have every reason to make their music available independently.  Eventually the labels will be left only with those groups in the middle - the ones that it costs a lot of money to promote from obscurity  with no guarantee of a return. As the CD dies out as a distribution media, no one needs to use the “distributors” to distribute.

Change is a fractal.  Even knowing all these facts, it’s hard to predict what’ll happen next to the music business in particular or the content business in general.  It’s generally true that genies don’t go back in bottles so DRM is likely doomed for music today and movies tomorrow.

I have a couple of guesses, though:

More and more often, groups will distribute directly over the Internet and, when they can, hire promotion companies to get themselves known or to game the various web sites through which users rate music for each other (iPayola?).

As much as it’s been an agent for change, iTunes will lose dominance both because of a proliferation of devices besides iPods and because, in order to get EMI to be more open, Apple has had to be more open as well and agree to distribute music in a format which is not only DRM-free but also playable on a variety of devices.  Ultimately, this middleman isn’t really needed either.

Artists will get paid by a combination of imbedding advertising with their downloads, pay for “live” concerts (some of which will be online), and – for the famous – pay for early access to new releases.  Other than new releases by stars, there will be little direct royalty income from downloads.

A contrary view – which may well be right – is that, without the expense of middlemen, download prices will be so low that it will be easier to pay than steal and so there will be royalty stream for the artists which consists of a larger share of a smaller price perhaps paid more often.

 

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Comments

Patrizia Broghammer

I agree with you, as usual 100%.
The Internet is the End of the middle man, unless he has something to offer.
Like value added services.
But these will be paid on a smaller scale.
The main result is the lowering of cost, not necessarily a lowering of income.
If you sell directly the customer pays less and you earn more...
P2P will not disappear and that should be kept in mind from those upthere.
Everything must change in order to be always the same.
And since technology changes so fast, you cannot sleep.
Otherwise you risk to wake up one they and find a different world where there is no place for you anymore...
Instead of fighting, the best move, in my opinion, would be to lower the copyright time and be really severe on that.
If you want the latest you have to pay, after the necessary time in which copyrights have paid the artist's work, it is OK to download and enjoy it.
In principle we feed on the past and that is how it must be.
Otherwise we should always begin from the beginning...
Patrizia

Keizo

"Artists will get paid by a combination of imbedding advertising with their downloads"

Gosh I hope not.

This whole thing is good news, but they should really give up the extra 30 cents. It only makes the music companies look more evil than they already are.

Bill

My $1.29 - Its true that artists can distribute themselves, but I disagree with your prediction that distribution outlets such as the iTunes Store will lose dominance. The very reason we have music stores in the first place is because these places (real or virtual) make it easy to find and purchase music. Its really the same thing online, we need consolidated places to find and acquire music (though, I make no predictions on where that cyber place(s) is). The world where everyone goes directly to the artists every time is much more complicated than going to the music store. That methodology has been cheaply available for quite some time, and it isn't dominant. I also don't think allowing iTunes tracks to play on devices other than iPod will hurt iPod sales. It will likely help iTunes Store sales, and may even stimulate iPod demand. btw, I still won't buy lossy music from iTunes especially at an increased price. CD's remain the best buy. I can encode at whatever bitrate I wish and they come with a handy high quality usually artful physical back-up.

Hashim

"and can redistribute (although not legally!)"

Just to be clear - it is legal to share songs with your friends. However, you cannot distribute songs far and wide on a P2P network. That's what is illegal.

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