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? |
