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April 02, 2007

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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