February 18, 2004
The Online Music Store Bubble
You might want to acquaint yourself with PaidContent.org – in particular, check out the great notes on the Midem conference. Forrester presented some research there that got a lot of press – in sum: the online music market will grow and the music industry will recover from recent losses, but this year, many online music services are going to go bust.
And why shouldn’t they? The a la carte services are not making much if anything right now. They can make it up in volume, but the market isn’t big enough for that now, particularly with so many services in the market. Apple has already gobbled up most of it (70% domestic, 30% world), and they can afford to run it as a loss leader because of the iPod. For the leftovers, Walmart is undercutting everyone else, running it as a loss leader as well. Meanwhile, the subscription services are off to a slow start; they should come on eventually, but problems involving portability and customers being accustomed to owning discrete units will continue to hold things up for awhile.
These services’ dying doesn’t necessarily mean that the market can’t work, just that it can’t support this many services at this time. But will it negatively impact the long term market in any way?
Looking just at the prices and catalogs, there doesn’t seem to be a significant effect. Given the thin margins on the a la carte download services, price doesn’t seem like it’s going to be a major point of competition and differentiation in the near term. At this point, the catalogs also don’t differ too much in size and scope. So, after the fall out, there will be less stores, but not necessarily a worse or different situation for the consumer.
Things might be worse because there will be less variety in ancillary services (recommendation systems, discussion boards, music store magazines, et. al). These do differ among the stores, and, moreover, they’re part of how the stores are trying to set themselves apart from P2P. Because the market cannot support all these stores, it will ultimately not support this variety of services. Variety is attractive and can help boost the market, but it’s not an end in itself, so this might not be major.
A larger dampening effect will be with subscription services if they go out of business, particularly Napster 2.0 (which lost a 15 million last year). Napster 2.0 users can’t burn songs to CD, but they can port them to a device, so it feels less like a tethered download and more like actual ownership. If all of a sudden, consumers don’t have access to a collection they’ve built up for a few months, there’s going to be serous frustration. Correction (3/10) – Napster users actually cannot port to a device. I remember reading it in the terms and conditions when it launched, but the terms have been updated, and this press release makes it pretty clear that porting can’t happen.
But the biggest problem will most certainly come from the balkanization of DRM formats and associated players. Real is following Apple’s lead with close tying of the DRM to portable players; so might Sony. People will build up collections from one store. As if incompatibility with other players wasn’t enough, it’s going to be horrible when someone basically has a defunct format when a store goes belly up.
Many people in the music industry and in the stores consider this format balkanization the biggest obstacle to a growing market. I’m not sure if it’s the biggest, but it certainly is an important one.
Another is the catalog. They have to get the hold-out artists on board, as well as deepen the catalog with live performances and other obscure recordings. According to Phil Leigh citing a Webnoize study, catalog and convenience were generally above price as a key reason why people preferred Napster.
But price is still important – it’s obviously been a key to the initial interest in Apple. Prices won’t change in the near term unless the record companies take a lower cut – I wonder how well Walmart will even do at 88 cents. Rhapsody’s experimentation gives reason to believe that a lower price can be made up with much higher volume, but right now the record industry isn’t changing their strategy.
Even if it does, and prices do change, this music bubble will probably still burst. But it might burst differently, and that could have longer term consequences for this nascent industry if it is to survive (if it even can). Short term gains will matter – how long can the record industry losses continue before it’s basically too little too late?
Filed by Derek Slater at 9:53 pm under General news
3 Comments
Is there any specific technical information available that tells what will happen if a service like Napster goes out of business? Do we know that the purchased songs will stop working? Has Napster admitted that, or addressed the question at all?
I’ve long maintained the primary lesson of DIVX (Circuit City’s DVD with extra DRM) is that “lifetime” means as long as the central DRM system lasts.
Even schemes that provide an “out” (like iTunes writing to CD) still loose functionality of the central system becomes defunct. I know people who have spent hundreds of dollars on iTunes, I really wonder if they will still think it was money well spent 5-10 years down the line (when they have exceeded their 3 computer activations and have strange backwards compatibility problems).
My expectation is that no DRM system will satisfy customers in the long term. Some people may try them now, and a very few won’t get burned. But by and by most people will figure out that DRM dramatically reduces the value of what they are purchasing, and will respond appropriately.
Since you can write to CDs I don’t think the iTunes scheme is unsafe.
That said I prefer buying unprotected CDs – usually at used CD stores where I trade my old ones. My average cost is about $5 a CD, the selection is much better than any online store and there liner notes are important to me. For convenience I make a copy on my digital jukebox in 192 kbps AAC …