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Tuesday, Jul. 3, 2007

iTunes / Universal Split Finds Music Biz in Dire Straits

By Robert Gorell
July 3rd, 2007

By now, one would hope that the major record labels were bright enough to start taking online marketing seriously. And, finally, it seems they are. But the music biz’s colossal failure to monetize online should be studied by every industry, so let’s start with a brief history of why Apple (APPL) has been headed for disaster since well before Vivendi’s (VIV) Universal Music Group, the #1 music content company in the world, put Steve Jobs in check by announcing that they won’t renew their distribution contract with iTunes.

The music industry’s in trouble because, it turns out, this Internet thing’s got legs. Record companies have had over a decade to learn how to market online, but they haven’t.

When I read this Rolling Stone piece on the record industry’s decline, a perennial topic for the post-Napster music journalist, I wondered what Don Dodge’s reaction might be. If anyone out there understands the fallout of the music industry’s “sue first, question our strategy later” mentality, it’s Dodge. These days, he heads business development for Microsoft’s (MSFT) Emerging Business Team. But in a recent past life, he was VP of product development for (the original) Napster.

So I forwarded the article with the expressed hope that he would blog it and Dodge was kind enough to oblige, and even linked to a 2005 piece about lessons to be learn from Napster’s demise.

The goal at Napster was to be the online distribution channel for the record labels, much like iTunes and the *new* Napster is today. There were several offers made to the labels that would have given them the vast majority of all of the revenue. The numbers were staggering. We had over 50 million users, many of whom were willing to pay $5 per month or $1 per download for digital music. That translates to about $250M a month or $3B per year. Even if Napster kept just 10% of the revenue that would be $300M per year against expenses of less than $10M. At the stock market multiples of the day that would have been a $15B IPO.

Now that’s a tough pill for any entrepreneur to swallow, but it gives Dodge sage wisdom on the iTunes shake-up:

This is a very high stakes poker game. Apple’s iTunes service would be seriously crippled without Universal’s vast music library. However, iTunes brought in about 15 percent of Universal’s first quarter revenue, or about $200 million.

Universal Music has a good point about music pricing. They believe that some new hit songs are worth more than 99 cents and some older songs could be worth less, or specially priced for a promotion. They want the ability to set prices for their own product. Wow, what a concept!

Dodge sees Universal’s willingness to take a stand on this issue as a good thing for consumers. It also provides a healthy reality check for Steve Jobs in the wake of iPhone mania. This line from Business Week‘s Stephen Wildstrom sums it up:

[Apple] might still be able to sell the special-edition U2 iPod, but the Irish rockers’ music would no longer be available from the iTunes Store.

Money for nothin’ and your clicks for free*

A few weeks ago, I had the privilege of meeting the William Morris Agency‘s Worldwide Head of International Music, Ed Bicknell; a man as renowned in the music biz for his sharp tongue and quick wit as he is for managing the 100X platinum British rockers, Dire Straits. (For instance, Bicknell recently joked to the London Times that he “…got into this business for sex, drugs and rock’n’roll, now all I do is look at computer printouts of P Diddy’s record sales.”) Bicknell was holding court amid a younger panel at the In The City of New York conference. After listening to him wax on about how much he despised the arrogance of record label executives and how most bands don’t even have the common sense to fire a drummer because his feet stink up the tour bus, I had to ask what I thought was a serious question: “Why does any up-and-coming band need a record label to promote them when the William Morris Agency would do a better job?”

OK, so maybe I did go on to explain why bands need creativity and good marketing more than they need the rock star trappings that folks at major labels or the William Morris Agency can provide. But my point was that, with all the hype about iTunes, people act as though it’s the only credible source for paid music downloads. I talked about how iTunes has ignored the long tail by not cutting enough distribution deals. Then someone raised their hand to point out that iTunes “…only accounts for 15% of album sales.” Only 15% of global market share (um, that’s quite a lot for one channel) and they’re still not doing it right? If you can’t get the Beatles–and, soon enough, U2–imagine what else you can’t get at iTunes.

The thing is, iTunes exists to support the iPod and, although it’s done quite a good job of that, Apple doesn’t have the clout to reshape the music business on its terms, but very soon–with or without them–you will. Ease of distribution is iTunes’ premier selling-point, but not if you still haven’t found what you’re looking for.

Unfortunately, I didn’t get a straight answer from Bicknell–who promptly stopped taking questions–but sometimes that in itself is an answer. Much like the print world, the music business is floundering from an early lack of online vision. But things are coming around. The first step is for content industries to realize they’re not at war with the Internet; they’re at war with bad marketing.

[*Limited time offer. See Dire Straits' 1985 sardonic pop anthem "Money For Nothing" for details.]

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Comments (5)

  1. [...] has been headed for disaster since well before Universal Music Group split with the iTunes store.read more | digg [...]

  2. You are incorrect in your assesment that Apple needs Universal. Only 3% of all music thats loaded onto iPods is purchased from the iTunes Music Store. Steve Jobs said this himself. That means the overwhelming vast majority of iPod owners are getting their music from their own CD collections or from pirated music. Universal isn’t helping Apple to sell iPods, but Apple IS helping Universal to make money selling music. Universal is the one with everything to lose here and I hope Apple stays firm and refuses to budge on its terms even if it means pulling Universal’s catalog from the iTunes Music Store for a while. Every day that goes by will mean millions in lost sales for Universal. They’ll come back around eventually.

  3. All great points, but iTunes needs content to be taken seriously. If the major labels have such problems with them, and indies can’t get in the front door, then iTunes progressively becomes a joke.

    Of course people only have 3% of their music downloaded from iTunes; it doesn’t sell 97% of the good stuff out there. The iPod sells itself, but they need iTunes to be healthy if they’re really going to push things like Apple TV and anything else that helps your network revolve around Apple.

    Sure, I’ll agree that Universal has more to lose in the short-term, but if Apple’s arrogance with iTunes continues, they’ll be in even worse shape when Amazon beats them on the short tail while sites like Beatport.com take niche market share in droves.

    Thanks for the great comment, NDP. It’s definitely food for thought.

  4. [...] exclusively online?* Or the time when William Morris Agency Worldwide Head of International Music Ed Bicknell scoffed at me for asking why any band in its right marketing mind needs a major label? Well, it [...]

  5. Itunes is my favorite music download shop, so i prefer beatport to download best dance music tunes.

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