How MP3 Will Break the Record Companies
By Jim Seymour
Special to TheStreet.com
7/29/99 10:52 AM ET
Let's dig back into the downloadable digital music
market once more, for a look at this phenomenon from
another perspective. I wrote about the "MP3 mania" first
here in May, initially in a couple of columns about the
marketplace and the players, then again last week on
the MP3.com (MPPP:Nasdaq) IPO, the outlook for
Liquid Audio (LQID:Nasdaq) and what I see as
e.Digital's (EDIG:OTC BB) prospects. The technology
side of this is pretty interesting, but technology isn't
what the MP3 phenomenon is really about.
The technological side will sort itself out: We'll get one
dominant format, probably, plus a couple of
niche-market formats promoted by what will soon
enough be fading companies. It's still early, I think, to
pick the ultimate winner in terms of a specific stock. But
it's not at all too early to look beyond the transient
technological issues to the much bigger, longer-term
issues of how MP3 and downloadable digital music in
general are going to shake the immense recording
industry. And the opportunities and risks that presents
for investors.
Initially what I'll call here the "MP3 market" -- for the
purposes of this column only, consider that synonymous
with "the downloadable digital-music market" -- will be
about portable music: downloadable tunes you can stick
in some kind of hang-it-on-your-belt-sized device you
carry with you. The market will also, obviously, include
downloading tunes to PCs' hard disks, already a huge
activity worldwide, if also a profitless one -- or worse! --
for the record companies.
As MP3 moves out of those fat but still niche markets
into home stereo components designed from the ground
up to download, store and play MP3 (and probably
other digital-music-format) files, and into devices you
can install in your car's dashboard for tunes on the
road, the MP3 market is going to get bigger and bigger,
eventually transforming and largely replacing the
current CD-centric music-distribution system. CDs in
their present form will be around for a long time to
come. But they'll be a lot less important.
The recorded-music business has evolved on a fairly
regular basis through several formats, from Edison's
cylinders, to 78-rpm records, to 33-rpm LPs, to
cassettes and eight-track cartridges, to CDs. CDs have
been with us for almost 20 years now, and for the past
several years the record industry has been looking for
The Next Big Thing, that inevitable next format that will
supersede the CD. That's clearly downloadable digital
music -- but they never thought it would be anything like
that, anything so ... intangible. They thought it might be
digital audio tapes, which the recording industry feared
and so killed; then they thought it might be the Minidisk,
which they also feared but which has pretty much
choked itself to death, despite Sony's (SNE:NYSE
ADR) perfervid promotions.
Now we have MP3 exploding around the world, and it
absolutely terrifies the record companies. Let me let you
in on a little secret: It's not just the threat of mass piracy
via MP3 that freaks the record companies, but their
clear and growing sense that downloadable digital
music is going to fundamentally change the structure of
the music business, to their profound disadvantage.
Dinosaurs in their death throes thrash around and
stomp smaller creatures left and right -- but they do
eventually disappear into the ooze. And that's where
record companies, at least as they're structured today,
are headed.
Because with our newfound ability to buy (or, yes, steal)
music in the size chunks we want, when we want,
without middlemen, powerful new avenues of
distribution are going to appear.
One of the most fundamental changes, upon which
nearly everyone in the music industry agrees -- if only
quietly, sotto voce and fearfully, in the case of
record-company executives -- is that MP3 is going to --
in fact, already may have -- brought about the rebirth of
the single. The notion that we'll go on buying CDs with
one tune we love, two or three that are OK, and a lot of
filler material no one (including, often, the recording
artists themselves) cares much about, is nuts. Yes,
albums will still exist, but the singles market will
overwhelm them.
Consider at least one aspect of the economics of this
change: If record companies are used to selling $15.95
albums, recorded on CDs, but suddenly find demand
has shifted to 99-cent singles, downloaded, how do
they support their bloated, overpaid staffs and
organizational structures?
And how does a Tower Records or a Virgin meet their
huge expenses when they're used to marking that
$15.95 down a couple of bucks for the first two weeks,
then pushing it back up to 16 bucks for the rest of its
shelf life? How do 99-cent sales, even if we do buy
music at "record stores," begin to replace $12-$16
sales?
It gets even better (or worse, depending on your view).
Consider some possibilities for music distribution, ca.
2002:
Artists set up Web pages and sell fans singles
downloads of their new cuts for 99 cents.
Those artists offer "collections" (read: albums) as digital
downloads for $10.
Those artists allow fans to buy annual subscriptions for,
say $20, which allows them unlimited downloads for a
year.
Those artists allow you to subscribe in advance for their
new releases, sending you an email with a new tune
every month.
(Think about the ad-revenue possibilities of these sites.
What would a million banner impressions a month on a
Rolling Stones e-commerce/downloadable music site be
worth? To heck with Budweiser underwriting Bruce
Springsteen tours ... what about Budweiser buying out
all the available banner slots on a Springsteen
download site for six months?!?)
Kiosks appear in malls and elsewhere -- no reason
whatsoever for them to be in "record stores" (remember
them?) -- where those without a fast connection to the
Web just stick their pocketable digital-music playback
devices in a slot, swipe their credit cards and get new
tunes or collections of tunes downloaded to them.
Note that in each case, the transfer of a physical good
to the buyer was eliminated. Note that all the busywork
of CD distribution -- from pressing, or "burning," discs to
sticking them into jewel boxes to boxing them up to
shipping them to warehouses to shipping them to
distributors to shipping them to record stores to putting
them out in bins -- is all gone.
What do you think that's going to do to costs? And as a
result, to prices? And to demand?
Some will say that new artists will be poorly served by
this change, that without the record companies' huge
A&R operations and budgets, devoted to finding the
next big stars, musicians won't get noticed, heard or
played. Phooey. The record companies have been
cutting A&R budgets and artist-development funds for
years -- and sites like MP3.com are already doing a
better job of promoting unknown musicians than any
record company is today.
Think about this for a few minutes and you can come up
with another half-dozen ways downloadable music will
revolutionize distribution, moving it from the physical
realm to the Net. Think about opportunities for making
money in this brave new world. Think about who's
gonna get absolutely killed in this new era.
Understand now why the record companies hate MP3
so much?
Dinosaurs, indeed. Big, dumb, ugly ... and going down. |
