How the iPod killed the music industry as we knew it

On Saturday, November 10 2001, Steve Jobs killed almost saved the music industry as we knew it: the first generation of the iPod reached the Apple Stores.

iPod 1st Generation
This machine ♥ CDs.

So let’s flash back to those prehistoric times. For about two decades, the music industry had made a killing by distributing billions and billions of digital masters. The CD, as conceived in the 1980, wrapped up the vinyl album into a shiny digital disc and propelled sales figure to an entirely new level.

But now, at the turn of the millennium, the CD monoculture found itself under attack. The PC (formerly known as a strange device for decidedly uncool nerds) and the Internet (formerly known as a service for decidedly strange scientists) had tainted the love affair of the industry with all things shiny and digital.

And a monoculture it was. Let’s have a look at the US-sales figures in 2001. The CD delivered roughly 94% of all revenues. As we know from the world of agriculture, monocultures have their advantages. You can waltz with hugely oversized machines through fields the size of the Central Park profiting from economies of scale. The drawbacks are equally known. “Monocultures can lead to the quicker spread of diseases”, as Wikipedia drily states.

The music industry fought the digital pest of copying their freely distributed masters like any Idaho potato megafarmer would do. After ignoring the first signs of disease, they started crop dusting. As with any pesticide, spreading DRM and later on even (involuntary) infecting PCs with root kits had some serious side effects. Their legal crop dusting may have killed Napster. But in 2001, after several years of digital infights, legally buying and downloading music was still virtually impossible. (Look at the charts, based upon RIAA revenue figures: downloads will not even appear before 2004.)

The CD monoculture
The CD monoculture: making a bundle with bundles.

But back to 2001. “iPod’s built-in FireWire® port lets you download an entire CD into iPod in under 10 seconds and 1,000 songs in less than 10 minutes,” boasted Apple in their press release. Yup. Basically, the iPod was CD player on steroids – sans discs and drive. You filled it by ripping your CDs on a Mac (no Windows yet). Strike your CDs. Any CD was fine. (Or you gathered some music files by strolling through the darknets of the times. But that’s a different story)

Now, let’s have a look at the CD. The recorded music industry, as any media industry, extracts value out of content by selling it via a medium. It’s a productification process, but it does no stop there.

Traditionally, the music industry bundled their content either into a single (buy one medium, get two pieces of content) or an album or compilation (buy one slightly more expensive medium, get at least eight pieces of content). Broken down, an album equals to a price incentive of something like buying 10 for the price of six.

From the business perspective, getting consumers to buy such a bundle makes perfect sense. Especially, if you are in an increasing returns business like software or media: the production of the content is a one time expenditure. Duplication and distribution add only marginal costs. Hence, the more you sell, the higher the returns.

Music in 2010: downloads = mostly unbundled content.

The value proposition seemed to have worked pretty well. Can you spot the CD-Single, containing mostly four titles? In 2001 it’s this tiny little orangeish sliver down there on the right, with a share 0.6% of all sales. Good for the industry. Because the cost of producing and distributing the single equals pretty much the cost of the whole album – which generates much more revenue.

As we saw, the original iPod was still somewhat of positioned as a CD aggregating device, somewhat legally filled by buying CDs and putting your music onto your device. Yes, overall sales were declining. But the industry was still selling bundled content to the consumer.

On April 28, 2003 this was going to change. Opening as the iTunes Music Store Apple, albums were still available. And still, the price for the bundle was lower than buying just a single piece of content. But how did the consumer react?

Killing the CD.

Have a look at the sales figures of 2010. The CD is shrinking fast, downloads are gaining just fine. But look at the product shares: 20% Download Singles vs 12.1% Download Albums. Essentially, more than two thirds of the formerly sold content bundles are replaced by single downloads.

iPod family
The iPod device family of 2011.

Coming back to the iPod. The device family still holds a market share of way over 75%. As pure software, it lives happily in every iPhone. The interface still honors the good old times of the album and the compilation. But buying music has massively changed. Be it the iTunes store, Amazon’s mp3 downloads, or any other digital music warehouse: single downloads rule.

Next time: what is really going on there? Is this sustainable? And can or should there be anything done?

The price of cotton, the cost of jeans, the value of digital media

Please strike the one word which does not fit here:

  • cotton
  • jeans
  • digital media

Right. Jeans is the wrong one. Because cotton and digital media are commodities, but the jeans a value added product.

Exhibit 1

As Joe Weisenthal insightful question in Business Insider: Guess What Surging Cotton Prices Do To The Cost Of Blue Jeans. In the last year, cotton prices almost doubled. As jeans are (or: should be) mostly cotton, what would be the effect on the retail prices of let’s say a Levi’s Ex-Girlfriend Jean (no kiddin’).

The effect is actually: zilch.
Levi’s bill of material rose from $1.41 to $2.53 – the final product cost $65.

Exhibit 2

Remember this infographic?

It tell’s you one thing: musician’s are cultural cotton pickers. Under current conditions, the (monetary) value is created elsewhere. And there’s not even a commodity bubble for music in sight.

Long Tail = Dead End?

I ran into Will Page a couple of weeks ago at FutureMusicCamp. Will’s not just the chief economist of PRS (and a really nice DJ). Actually, he more or less singlehandedly convinced me, that collecting societies don’t necessarily look and act like grumpy relics from the shellac age, but that their people can vividly think outside the box.

Especially one part of his keynote got me thinking. After some extensive numbers crunching, Will declared Chris Andersons Long Tail as wishful thinking. According to his numbers, the idea of the Internet opening the floodgates for a huge diversity of content to make it on the market is just wishful thinking, a mere virtual myth.

What Will did, was analyzing We7 and Spotify in the UK – and comparing this data with a Long Tail curve. Have a look at his April interview in TechDirt. There’s a nice graph right in the middle, and some good explanation on the how’s and why’s.

Now, the interesting part is this: why differ the curves of We7 and Spotify?

… We7 has a strong editorial with excellent artist promotional campaigns, whereas Spotify is editorial free and allows the consumer to graze the field at their leisure. Consequently, you can see that We7 (blue line) is more hit centric with a 90/5 rule and Spotify (green line) is more democratic with an 80/5 rule which, when you step back, is common sense made complicated but it’s nice to see the math adds up!

Right. And this most likely explains the not so long tail of the curves. It’s mostly a matter of user interfaces. Compared to any physical store, all net-based services share one thing: the depth of their catalog. Just imagine your local music dealer (if he still exists), blown up to the size of an IKEA warehouse. Anything, which can be licensed, can be bought.

The problem is: we’re not IKEA talking here, where you stroll through nicely decorated storage areas. A typical media store on the net is more the equivalent of a 20 square meter booth. Yes, there’s this giant warehouse attached. But the shelfspace is rather limited. Look at iTunes: either you know, what you are looking for, and you directly search for it. Or you rely on the best sellers and recommendations.

To unleash the long tail, you would either need a user interface, which IKEA-like unlocks the secrets of your warehouse. Or you find an affiliation model with the original rights holders, which offers curators and resellers some bit of a better cut than relying on a retailer sharing a bit of their slice with you.

Blaming Steve

May you live in interesting times. Naughty Steve tells the pop execes what’s wrong, and some are steaming. The probleme is. Steve Job’s arguments are rather flawless. And his contrarians sometime have to hide their real feelings behind the officialy rigid copororate points of view.

Jobs argument goes like this:
– The iPod plays music. The majors only want them to sell restricted music. They have a rather convincing 70% market share. So Apple offers DRM.
– Consumers don’t like restricted music that much. So they want to rip their CDs (In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves) and put them on their iPods. So Apples offers MP3.
By popular vote, consumers are filling up their iPods with unrestricted stuff (just 3% of the music listened to on iPods is bought at iTunes). Voilá: Forget about the DRM-thingy as the phantastic lock-in of the Apple iPod customer.

So why is Apple the undisputed leader in music download sales. And making gazillions with their shiny little iPods? Other people are selling downloads, too. As other companies built cutesy music players.
Music has always been a software/hardware business. That’s why Sony still owns a major part of a major label. The old thinking went like this: Own the software (A.K.A. music), push your hardware (your real money maker). Unfortunately, the walls of this fortress made out of love, money and eternal happiness crumbled a couple of years ago. The dematerialization of music (ooops, there goes the CD) lowers the barriers of entry into the music player market. Step into any electronics discounter, and you’ll find USB-sticks with head phones attached. Because technically speaking, all you need for a music player is storage and some cheapo computing power.
But now comes to the tricky part. The user interfaces. Yes, interfaces. Because you need two. One for the player (if it’s not just a sub standard iPod shuffle-like music stick). And one for the PC, which feeds/syncs with your player.
Ever tried Sony Connect? Do you think Windows Media Player is a masterpiece of usability? Here we go. iTunes is far from perfect. But it’s holy trinity of player, PC and managing software seems refined enough to make consumers stay. Of course, the brand isn’t that bad, either.

But is this a lock in? Probably not. Let’s have a look at the German market. The download market leader seems to be Deutsche Telekom’s musicload. Well, tons of tv advertising should have at least some effect. Now let’s look at the portable music player market. In 2006, 22% of all households now do own a portable MP3 player (up from 14% in 2005). High penetration you’ll find in the higher income bracket. Lower income brackets are finally slowly taking on.
This means: the early adopters are in Apple’s core market. The downscaling already starts. And with virtually all mobile handsets becoming equipped with removable storage and MP3 players, the scene will change dramatically anyway (Hello iPhone).
But let’s come back to the Jobesian argumentation. His point is clear and simple: we don’t want or need no steenkin’ DRM. And you guys just think you do. And why is this all coming up? It happened at Midem. Some industry execs couldn’t get stopped talking about DRM. Some people couldn’t get stopped talking about execs talking about DRM.
And with <a href="Midem“>The NY Times / Herald Tribune jumping in, the whole thing started to become really public. Because, as stated before: the public doesn’t like DRM either.

Why Steve is the better Bill

The music industry is an entertaining place. As honorary buffoons of the traveling trade show circuit, we were allowed to poke fun at their musty business models (“still trying to protect our flailing horse carriage factories since 1875”). Paint their potential saviours in gruesome colors (“some mobile network providers have higher earnings than the revenues of all you guys combined”). Or tried to scare the #%@! out of them by explaining some tech basics (“in 2010, a top of the line hard disk will be able to contain every piece of music which has ever been recorded – preferably preinstalled”).

It has been fun. But now it’s gone. The industry execs took over. They slaughter their holy cow DRM (well, almost). Make fun of their business models. Come on, it’s just not fair.

But why does this make Steve the better Bill? Read this: Apple – Thoughts on Music. And the we can talk about it a bit more.

PS The music industry is really an entertaining place. But people working in the industry tend to suffer from a very specific occupational hazard. They become a little bit hard of hearing.

Told you so (almost)

Popkom 2004. And Reuters asked the question: Is the mobile phone the next iPod Killer? Some analysts believe the mobile phone with hard disc capacity could revolutionize the MP3 player market just as the camera phone did for the photography world. “There’s no reason to think we won’t have a five-gigabyte hard drive on the market next year,” said Hubert Gertis, a technology analyst for Berlin-based consultancy

Back then, (Giga)Om Malik begged to differ. I just don’t buy “phone as an IPod Killer” argument. OK. Here are the specs and here’s Apple’s iPod killer in action.


See, told you so. Almost. (And could somebody please delete the last paragraph of this piece?)

Anyway. The iPod killer to be (formerly known as iPhone) is actually a video iPod you can shake and talk to. The first thing I thought: how can they build it? Seems like, designing and manufacturing mobile phones isn’t rocket science anymore. Seems like the hardware part in electronics is already a commodity. So they won’t build it but outsource it (just remembering my crappy Treo: Great UI, sloppy manufacturing. So commodity might be a but harsh).
But why’s everybody crazy about it? It’s not just the touchy-feely haptics and the supermodel looks. How about a sexy user interface. Look at the video, again. Compared to this, any Windows smartphone supersoftware looks like a second runner in yesteryears pug ugly contest (Treos refereed, the Nokia family made up the audience. And of course, Sony Ericsson gets the honorary village idiot award for implementing an email client which makes it utterly impossible to delete any message you receive).

Bill sez: DRM s*cks

Well, of course he didn’t. But he meant it. Or how would you explain an advice like this, while meeting the politburo of the US blogosphere: People should just buy a CD and rip it. You are legal then. As Techcrunch’s Michael Arrington notes.

Now, what is this all about. DRM is a well loathed acronym of the digital entertainment world. Depending on your point of view, it either stands for Digital Rights Management. Meaning, as a publisher you can remotely control the access to digital data. Or Digital Restriction Management. Meaning, it’s a stupid/devious scheme to extend a business model of the 15th century (Johannes Gutenberg invents European movable type printing, thereby enabling mass media production) into the 21st century, which causes immense collateral damage.

To be honest, I understand both positions. Probably the most important digital media topic right now is the question of the content value chain. It’s a nice thing, that now everybody can get worldwide distribution. It would be even nicer, if this distribution could be monetized. In the current setup, producing user generated content means you become an active member of the attention economy. Attention economy always means, that all your efforts will pay out, if you get enough attention of a player with a more tradtional economic approach. It’s the American Idol model. Lots of people give their heart and soul, accept the possibility of public humiliation, to finally get an intern job at a global whatever conglomerate.

I theory, DRMing digital content would transform an infinitesimaly copyable digital file into ressource of virtual scarcity. Transforming it into a sellable good. Sounds good. Unfortunately, this just theory. In it’s current setup, DRMed content is cumbersome for consumers and adds layers of cost and complexity for copyright owners: choosing a DRM, licensing a DRM, paying for DRM – and paying for 1st level customer support, because the consumer does neither understand the tech nor the legal licensing stuff involved. And it can get worse. Just ask Sony BMG about its brilliant idea to infect consumer computers with black-hat-hacker-style root kits.

Of course, DRM is about Digital Restriction Management. Take a freely accessible set of data. Shrinkwrap it using DRM. And whoosh, you’ve restricted the total accessabiliy, and made those restrictions manageable, too. The concept is of course highly attractive. Let’s say, if you put some sensitive data on an intranet. In mass media, there a two different proponents. Traditional media companies, wanting to protect their traditional business model. And governements from überdemocratic countries like China and Iran. And that’s where the collateral damage starts. Because unfortunately, if you really want to shrinkwrap some media into a closed shop, you have to include pretty much all devices which potentially might be used to play such a file.

Which translates into: for protecting a nice old business model we put everything in place to jumpstart a dystopian surveillance society, modeled after Orwell’s 1984 and the East-German Stasi.

But I think, it really stands for Does it Really Matter. Correct me if I’m wrong. But even in a totally shrinkwrapped media world, you will have to leave some space for consumer produced media. Uncle Umpty will have to be able to make his dreadful birthday movies and post them somewhere in the digital realm. The next Robbie Williams will have to put some first moves and shakes onto a web site of his choice. And let’s not forget consumers. Yes, DRMed music downloads are picking up and the iPod saved the Apple. But the digital format of choice is still yer good olde MP3, no strings attached. When the Bill says: People should just buy a CD and rip it, he’s just stating the obvious. Guess where all the music is coming from, filling all those iPods. And the gazillion other MP3 devices out there in the wild, wild consumer world.

But let’s come back to the digital value chain. Is DRM evil? Nope. But it can be used for mighty evil things. So better be careful of the collateral damage. In its current implementation, DRM ist mostly stupid. Interoperability is a word consumers should not have to learn to hate (as it per se does not exist). DRM can be a nice thing in a confined setup. But it’s not a silver bullet. As a value chain of one chain link is a pretty feeble excuse for not being able to adapt to the brave new world of networked entertainment.