Its Bits

February 17, 2006

The Audio Wars: Apple 1 – Dinosaur Media Companies – 0

Filed under: Apple, Bits, Entertainment, Music — cheyenne @ 3:38 pm

Sometimes I think of the “old-line” media companies like the dinosaurs caught in the tar pit in that scene in Fantasia. With fear in their eyes they try to struggle free but they just can’t get away from the way the business has run for the last fourty years.

We are in round two of this battle.

Round one was lost when the music side of the business made a strategically bad decision in response to on-line downloading of music. They took the approach of trying to put the Napster/file sharing genie back in the bottle, rather than the Microsoft approach of “embrace and extend.” In the embrace-and-extend model, the music companies would have realized the demand from customers to have their music in digital format. It would have seen how people were learning how to do technical tasks like ripping music, connecting MP3 players to USB ports, etc. all so they could carry their music with them and make mix tapes easier, not to mention being able to get the songs that they wanted, not the songs that a physical music store could hold. The embracers would have poured money into the industry enhanincing the ease of use of these new technologies (no more ripping, etc), they would have made their whole catalogs availble for sale at very attractive prices, and they would have aligned the industry on a digital rights management platform that was transparent to the user, but protected the copyright holders. Instead they tried to shut down the existing MP3 distributors while only offering customers a limited set of music on-line, and always encrypted with heavy rights management. Essentially they offered a much worse product at a higher price, and trained people to go elsewhere for their digital music.

It is ironic that the one company that stepped in to this market and did things the right way was Apple. First they took away most of the technical difficulties of the playback device by introducing the beautiflly engineered Ipod player coupled with iTunes software. In this integrated environment, many of the difficult steps of ripping and transferring were hidden to the user. And when they launched their iTunes music store it too was easy to use, hid the DRM as well as possible, and was attractively priced. This is the service that the media companies should have developed.

So why couldn’t all the smart people at Warner Brothers, Bertlesman, et al come up with this solution? Several reasons. First they were stuck in their old way of thinking, and could not understand this new technology and did not respond appropriately. Secondly, even if they did realize what the right answer was, their existing agreements made it difficult for them to react. For instance, old contracts had nothing to say about who owned the rights to distribute music over the internet. Also, record stores would have objected to direct sales. So it was really hard for them to move and somone who was not so entangled was able to slip into this gap and get over 80% of the MP3 player market. We’ll see the same themes running through my next post on Round Two: The Video Wars.

January 30, 2006

About this Blog

Filed under: Bits, Entertainment, Music, Negraponte, Video — cheyenne @ 10:49 am

This blog looks for investment opportunities brought about by the conversion of the entertainment industry to a digital marketplace. In it I try to pick the winners and losers as they are battered by the changes brought about by new technologies.
This title of this blog ItsBits is an homage to Nicholas Negraponte and his 1995 book Being Digital. In it he quite insight fully (and way ahead of his time) wrote:

World trade has traditionally consisted of exchanging atoms. In the case of Evian water, we were shipping a large, heavy, and inert mass, slowly, painfully, and expensively, across thousands of miles, over a period of many days. When you go through customs you declare your atoms, not your bits. Even digitally recorded music is distributed on plastic CDs, with huge packaging, shipping, and inventory costs. This is changing rapidly. The methodical movement of recorded music as pieces of plastic, like the slow human handling of most information in the form of books, magazines, newspapers, and videocassettes, is about to become the instantaneous and inexpensive transfer of electronic data that move at the speed of light. In this form, the information can become universally accessible.

Eleven years ago, people did not consume digital products per-se… Today music, video, books can all be bought and delivered to a personal electronic device in a completely digital format.
Entertainment is a very visible and high value market which lends itself to being digitized as Negraponte wrote about. Witness the impact of the introduction of MP3 on the record industry. Increasing bandwidth, flawed encryption schemes and better compression methods means that video is going the way of music.Ipod

Welcome along for the ride… I encourage feedback, especially disagreements.

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