A Digital Bust?

It might be said that in the mid 1990s at the cusp of the dot-com boom there were two kinds of business models. First, the traditional business that knew nothing of interaction outside of possibly a well-educated retailer and was staunch against the ideas of the new delivery platform, understanding all to well the depth and breath of profit generation. And second, the entrepreneur, who understood the concept of breeding interaction and catering to the consumer by utilizing this new platform, but had little in the way of a profit-generating plan.

Well, we all know what happened to the entrepreneur. The bubble burst and many of these overnight millionaires felt the cold reality of investor sentiment and income-profit models early in the new millennium. Some of these experiments went on to garner success and garnish their successes with profits, while a great many others failed miserably despite the consumer-centric idea.

The traditional business, however, managed to survive the initial bust but have come to feel the sting of their decisions too. After the turn of the millennium consumer-centrism became all the buzz and now user-generation is the next level of the idea so sorely overlooked.

For the entertainment industry as a whole, and most particularly the music business this dichotomy is painfully apparent. The opportunity to marry consumers and the new technology to build income-profit models in the early days existed, but it was not executed. There is enough blame to go around: record labels, retailers and even musicians themselves.

Traditionally, music retailers where the physical merchants of a physical product and the product they sold was composed primarily as a piece of plastic containing music. Taking into account the difficulty they had converting their retail spaces and their mindsets from vinyl to cassettes to compact discs, it is not hard to comprehend why they their income-profit model and belief system struggled to continue to adapt to the consumer.

The difficulty in making a smooth move to both compact discs and diversifying into multimedia entertainment equivelants such as dvd’s and gaming opened the opportunity for other retailers to move into the music retail world. Because of these new retailers belief that entertainment content could be sold as a “loss leader” it began a price war with traditional retailers. The SLPR of $18.99 was already deemed to expensive in the minds of the consumer and the lower prices struck a chord. Furthermore, these diversified stores were able to cover a broad catalogue of entertainment content as well as offer additional related products to the entertainment lifestyle changing the consumers perception of need.

The first incarnation of online retailers began to chip away further at traditional music retailers. These online eCommerce entities were able to stock an even broader and deeper catalogue of seamlessly integrated titles and were able to compete effectively with the new pricing schemes being offered by the brick-and-motor counterparts. Unlike in the book retail industry, where the major players adopted the new model early and began competing with their existing brand images on the internet, the music retail world shunned the new concept due to conversion costs and a belief consumers were not interested in obtaining music over the internet.

Of course, online physical sales were only the beginning of internet sales. Increasingly well written algorhythms of suggestion equate to an employee’s recommendation and consumer response systems, such as user-generated reviews, rating systems, etc. allow further sales precision and build consumer attraction in the space.

No one successfully predicted digital downloads would gain the traction they did and none of the existing retailers were able to enter into the space quickly and seamlessly. In the case of traditional retailers, they were still resisting technological integration and were now behind in building an online brand. For big box retailers, they were too focused on the breadth of their physical products to begin the integration of a limited digital product. Finally, existing online retailers were focused on perfecting the existing models that was still in its infancy and were thwarted by the industry itself as it sought to protect the physical product.

It was in the seemingly best interest of the record companies to protect their product. The problem is, the product perceived by the record company was the compact disc at this point, not the music itself. Much like for traditional retailers who’s narrow definition of their business did not allow for reaction to the changing marketplace, record companies were unable to react to the digital age.

Previously, they fought format wars themselves and many considered the compact disc the final incarnation of their product after difficult transitions between vinyl, cassettes and compact discs previously. To adopt to another new technology would require not only changing the manufacturing and distribution they already control, but also assist the retailer-to-the-end consumer channel change. Furthermore, new technology meant renegotiating existing contracts and redevelop marketing to reflect these changes. These were expenses the industry as a whole was unwilling to execute, despite the consumers apparent interest in the formats.

After the explosion of peer-to-peer networking the record company’s focused their efforts on fighting the potential format change rather than adapting to it. Their primary interest was guised as piracy protection by executing the breath of Copyright especially as it relates to replication and distribution clauses. However, defending copyrights was only part of the equation. The suits were in part meant to dissuade the new technology itself in many ways. The defense mechanism (un)intentionally put in place to ward off early adopters from the format even beyond the successful p2p networking lawsuits.

Music thus far on the internet were primarily MP3 files ripped and shared directly between consumers as they ripped their personal catalogues to digital form. It was clear early on, music was about the community online and there was not just an interest in the music because it was “free” as much as it was

The few sites that attempted downloadable music on the internet were thwarted by the major labels in difficult to navigate licensing deals, if it was even discussed at all. The difficulty for these stores existed first in obtaining the content itself and them reaching the consumer with the content in a usable fashion. Not an easy task considering the pressure the record industry was also putting on the player market and the threats of aiding piracy in the fashion of VHS and Xerox Copyright cases of decades before.

Interestingly enough, it was a technology company with a long history of innovation and ability to tap first adopters that finally helped swing the door the other way. Apple’s iPod simplified the MP3 player world into one sleek and easy to use gadget even a luddite could appreciate. The appeal of the iPod with the consumer was they already had a vast library of ripped content and no mobile way of utilizing it. Apple understood this consumer need and filled it extremely effectively where their predecessors had not and leveraged their consumer-centric idea.

Furthermore, Apple uniquely paired its player up with a software package called iTunes that included an online downloadable store. Novel as paid downloads seemed, free is always cheeper than even 99cents and early use of even Apple’s store was light at best, no matter what the headlines touted. Apple’s co-branding of the iPod+iTunes model not only with the entertainment industry but with the end consumer allowed it to grow the market effectively. The key to Apple’s success was its ability to balance the consumers desire for the downloadable catalogue and the record company’s interest in protecting the tracks thus supposedly quelling illegal distribution.

Other download retailers eventually developed similar systems of obtaining protected content from the labels but were never able to give the consumers what they wanted, a seemless experience from storefront to computer interface to player. The record industry helped ensure that by throwing so much weight behind a single individual store and player, rather than developing a full distribution network online. Apple helped corner the market by refusing to license their already accepted technologies.

Of course, the protected tracks use a proprietary encoding, not the standard open format MP3. This encoding is not lisenced between stores or even apple and other players and therefore creates inoperability when trying to access the purchased music outside of a particular insular system. This is not as much an issue now, because the dominate player in the industry is the iPod and the dominate media player software is iTunes and the domint store is the iTunes. However, this marriage of player and software has its limitation as more players continue to enter the marketplace including integration into smart phones and a greater wireless network of devices for consumers to use.

This begs the question, what if interoperability were considered earlier on? What if the record labels insisted on a single protected file format for all downloadable stores and a level distribution playing field online? After all, in the early days of digital downloads, the labels controlled the content and could exploit the demand of the consumer to the retail middleman on their own terms. Now, however, record labels are at the mercy of such retailers and not truly in control of the distribution process.

What if consumer began demanding interoperability? What if the governments forced interoperability for any number of reasons from consumer protections to antitrust practices?

Even today, the number of paid downloads in the market place versus the number of players owned works out to between 35 and 55 tracks per player paid, depending on what research you utalize. Paid downloads are still in their infancy with some statistics suggesting only one in every ten portable device owners actually paying for their paid downloads. Furthermore, over-the-air mobile downloads enjoy an even slower adoption rate and a non-success stigma in North America using these same benchmarks.

Greater acceptance of the paid download market is not going to come from the just educating against piracy or persecuting those who do. It is not going to come from a single 99 cent pricing scheme available at a few boutique online download retailers. It is going to come from an integrated online and mobile distribution system that the consumer can embrace, not be stymied by.

The biggest problem with the digital music market has been the overall lack of consumer-centric thinking by both retailers and the record labels in the way they treat the product. Each, no matter how seemingly successful based on market share or profit margin, have worked to hold the greater consumer interest down in favor of holding tightly onto their own perceived slice of the pie. The lack of real competition hold back both innovation and adoption and with few recognizable brand names offering a variety of complementing entertainment content digital music retail remains

Imagine if there was more than just Apple, eMusic, Rhapsody and Napster to get a purchasing membership from and by going to the store you received more than just a song and maybe a record cover. Imagine if the likes of online giant Amazon, the number three music retailer, were able to leverage their combined physical product and the digital version in the marketplace. Image if Best Buy and Walmart ,the two largest physical music retailers, were able to not only combine their physical and digital offerings online but also at kiosks in their stores. Image a time when you could purchase any CD you wanted by browsing a kiosk at the store and every title was always in stock to be burned on the spot complete with custom printed artwork from the online database. Image further the kiosk concept allowing you to load your portable devise just by bringing it to the store and downloading the full art files and the music and then being able to offload it at home to your computer without the file protection problems now going backwards. Imagine a world where record labels and retailers sold music in all its forms rather than selling a piece of plastic with music stamped on it as a product. Imagine all the people involved, consumer, label, retailer and even musician coexisting for the greater common good of the art of music.

Advertisements

About thedoormouse

I am I. That’s all that i am. my little mousehole in cyberspace of fiction, recipes, sacrasm, op-ed on music, sports, and other notations both grand and tiny: https://thedmouse.wordpress.com/about-thedmouse/
This entry was posted in business commentary, Opinion. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s