Ladies and Gentlemen,
Fake Steve Jobs at his finest. This is the most succinct thing I’ve read on the music biz in ages.
The music industry nobs have finally figured out what we’re doing: “So you’ve no doubt seen this story or one like it explaining that Universal Music Group won’t renew its iTunes deal. And you’ve seen people saying that the majors are trying to ‘recalibrate’ their relationships with us. Actually what’s happening is they’re crapping in their pants. They woke up one day and realized that we’ve got 80% share of digital downloads. Suddenly all the power in the value chain resides in one player. Oops.
Here’s the thing. These guys could have done what we did. If you’ll recall, in the early days of the Internet, that’s what everyone figured was going to happen. The majors would build digital distribution arms. But they didn’t do it, because they didn’t understand technology, and they didn’t want to invest in building this expertise, and they were freaked out about piracy and paralyzed with fear. So we stepped in. We invested in people. We developed software that’s easy to use and works flawlessly. (And if you think that’s trivial, think again. It’s huge.) We promoted it, we marketed it, we haggled with all the majors and struck deals. We took all the risk. And yeah, now we’re reaping the reward. And guess what. The majors want a bigger slice. Um, for what? We did all the work. Ain’t gonna happen, slick.
Here’s the back story. The music companies are in a dying business, and they know it. Sure, they act all cool because they hang around with rock stars. But beneath all the glamour these guys are actually operating two very low-tech businesses. One is a form of loan-sharking: They put up money to make records, and then they force recording artists to pay the money back with exorbitant interest. The other business is distribution. They’ve got big warehouses and they control the shipment of little plastic boxes that happen to have music in them. We’ve seen what the Internet has done to brick-and-mortar retailers. Next to go are the brick-and-mortar warehouses. The guys running the labels are pretty stupid — most are just dirtbags who started out as band managers or promoters — but they’ve now figured this out, and they are fighting like cornered rats.
The labels are finally sort of vaguely getting clued in to the fact that in this value chain the power resides not with the creator of the product but with the distributor — and that by letting us make the online music store they’ve taken themselves out of the distribution business. In the world of digital, the distributor is Apple. We’re also the retailer. And the marketer. Another way to see this value chain: Think of the kids in China who make iPods. In the music industry value chain, the artists are the equivalent of those kids. And the labels are the equivalent of the Chinese companies that employ those kids. (Not a perfect analogy, I realize. But it’s kinda sorta how things are.)
In the days of vinyl and then CDs, the labels managed to hold on to a larger share of the power in the value chain by having loads of retailers in a highly fragmented market, and playing them off each other. In the digital world they’ve got us. And that’s it.
Ironically the mistake the major labels made was the same one that IBM made when it gave the DOS franchise to Microsoft nearly 30 years ago. They had a piece of work that they couldn’t do on their own or didn’t want to do on their own and they didn’t view it as critical or important so they outsourced it to a partner. (’Go make us an online music store.’) The partner turned that seemingly unimportant work into a way to accrue power and create a monopoly and control the industry. Today in the music business we’re about where IBM and Microsoft were in 1989, when IBM finally got hit with the clue stick and realized what Microsoft was doing.
How will it play out this time? I don’t know, honestly. But I like our chances.”
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