It is stating the obvious to observe that the music industry has been hit by a great deal of disruptive turbulence over the past decade. First it was illegal downloading. Then iTunes came along and disintermediated the entire business. Then bricks-and-mortar music retailers started collapsing. Now major pop stars are in open revolt against the big music labels.
The creative destruction has been Carthaginian. And the carnage isn’t over yet.
The launch of MySpace Music, which brings Web 2.0 social dynamics to the music business, is bound to provoke another e-ruption in the global music industry’s business model. Steve Jobs’ iPod/iTunes/iPhone triumvirate has been ruling the industry for only a few years, but already another mega-shakeout is in the works.
Make no mistake, MySpace Music is a direct salvo across Apple’s bow by the Big Four labels, which are furious at Jobs for muscling into their business, making iTunes the new gatekeeper, and declaring that he’s now calling the tune (especially on pricing).
After months of intense negotiations, the Big Four (Universal, Warner, Sony-BGM, and EMI) have not only signed deals with MySpace Music, they have taken equity stakes in the business. MySpace Music is a one-stop service that offers streamed music free. That’s right, free. The music is free because revenues are generated by advertising and selling concert tickets, cell phone ringtones, and band merchandise like T-shirts.
The Web 2.0 social dynamic is music sharing. MySpace members can stream music at no cost and share customized playlists with their online friends. “We see ourselves as a social port where we filter information based on what’s of interest to you,” said Amit Kapur, MySpace’s COO, in an interview with Reuters.
MySpace Music signals a major about-face for the Big Four. Not long ago, they were terrified of social networking sites like MySpace in the same way they’d been paranoid about digital downloading. In fact, Universal Music was suing MySpace in the courts (MySpace stipulated that the suit be dropped as a pre-condition to the MySpace Music deal).
Edgar Bronfman, the CEO of Warner Music, had once threatened to go medieval on Napster’s ass. Now Bronfman admits that his industry failed to understand the potential of the Internet. “The music industry was slow to recognize that ultimately this is an opportunity,” he recently admitted in an interview with the Financial Times. “But in fairness, when your house is burning down, it’s hard to see that the foundation may ultimately support a better house.”
In Throwing Sheep in the Boardroom, we devote an entire chapter to the Web 2.0 e-ruption of the global music industry. Looking back, it’s staggering how quickly Steve Jobs took control of the global music business with a pocket-sized portable device.
The music industry, to be sure, was ready for the taking. Bloated with gushing cash flows for decades, overfed industry execs had been swaggering and ego-tripping far too long, deluded by the conviction that their blockbuster business model would never be challenged. Spoilt pop stars signed to multi-million-dollar record deals were pampered by battalions of “A&R” people swelling the labels’ payrolls. The all-night partying was a moveable feast.
The back-office realities were decidedly less glamorous. The major labels worked collusively with their retail chains to keep margins high. No surprise that they ended up in court on charges of price-fixing and other obnoxious practices. Then the Internet exploded, handing power to the kids and putting an end to the industry’s multi-billion-dollar ego trip.
Worse news came when Steve Jobs invented the iPod. At first it looked like a cool fashion accessory. Then the other shoe dropped in 2003 when Apple launched iTunes, which quickly became the biggest music retailer in the world. Soon Steve Jobs – to the immense irritation of the Big Four – was dictating prices (i.e. discounted prices). iTunes’ consumer-friendly per-song pricing ground down the industry’s huge margins.
It didn’t take long for the bricks-and-mortar music retailers to understand that their business was being blown up by the iTunes e-ruption. Musicland, a retail powerhouse that once boasted more than 1,300 stores, filed for bankruptcy in the United States. Tower Records, one of the world’s biggest store music retailers, liquidated its assets and went out of business in 2006. In Britain, the Sam Goody music chain packed up and left the market. Steve Jobs had taken control of the global music industry in less than five years.
Now here comes MySpace Music. On a strictly business level, it’s difficult to avoid the conclusion that this Web 2.0 platform – despite the Big Four’s apparent hypocrisy in embracing something they once combatted – is a counter-strike at Apple. On pricing alone, free music certainly beats 99 cents a song.
The Big Four meanwhile have been vertically integrating into other music-oriented social networking sites. Last year, Universal Music took a stake in the urban social networking site, Loud.com, which features mainly rap music, and made a strategic investment in another music site, Mog.com. The other big labels meanwhile have partnered with Imeem.com.
Steve Jobs, as the incumbent industry gatekeeper, can’t afford to be indifferent to these moves. When the MySpace Music deal was being inked months ago, Jobs was scrambling to propose a peace treaty in the form of a new business model. Instead of selling music downloads via iTunes on a unit-pricing basis, customers could enjoy free access to its entire library and Apple would pay music labels a fixed sum for each iPod and iPhone device sold.
This business model wasn’t actually new. Nokia was already paying Universal Music $80 per device to finance its “Comes With Music” downloading service. Apple is now prepared, it seems, to reach deeper into its pockets and offer music labels a cut of its hardware revenues. Stay tuned on that one.
The mega-shakeout in the music industry is far from over. Many potential configurations are possible. Will MySpace do a deal with Google to put social networking and music inside the new GooglePhone? Google and MySpace, remember, are already in bed through a $900 million advertising deal that expires in 2010. And surely Yahoo! and Microsoft want a piece of the music market. And earlier this year, when America Online paid $850 million for Bebo, it must have had music in mind given the British social site’s youth demo. Facebook clearly has to get into the music space. What about a possible Facebook-RIM deal to include music downloading into the new Blackberry handsets? Anything is possible. No deal can be ruled out.
Beyond the music industry, these e-ruptions are about to blow apart all the established media industries. I have already offered some reflection in this space to the Web 2.0 impact on newspapers. The book publishing industry is another slow-moving, complacent dinosaur that – with the emergence of e-books and Amazon positioning itself for vertical integration – is doomed to disappear from the media landscape in its current form. When bricks-and-mortar book retailers start failing – and that will happen soon – you’ll know you’re witnessing the early rumblings of a major Vesuvius-like market e-ruption in the book business.
I will be returning to the Web 2.0 revolution’s e-ruptive impact on newspapers, book publishing and other media sectors in future postings.