Analysis of IT news

Tuesday, September 25, 2007

News item: releases its MP3 store

News item: releases its MP3 store

Analysis: we are witnessing the beginning of a big shift in the balance of power in the online music industry.

Legal download of MP3 songs is nothing new. Apple's iTunes music store has been selling songs from EMI music major in MP3 format for months now. Recently, Universal announced a 6 months trial where they would sell unprotected MP3 music through a variety of online retailers (Gbox as well as some music label's own sites).

But this is the first time that an online music store proposes such a wide offer of legal MP3s. A one-stop shop where one can easily buy pretty much all the legally available MP3 songs on the market. This means a lot of the top songs we can hear on the radio. And it's not even from Apple!

Needless to say, this is terrific news for digital music sales. Customers can now purchase more songs in MP3 format. At a cheaper price ($.89, contrary to Apple that hiked up the price from $.99 to $1.29 for unprotected songs). And from a known retailer. All this will likely boost online music sales (very few people still believe that copy-protected music prevents any piracy).

But this move also contributes to a shift in the balance of power in the online music business. Until now, proprietary song formats gave the power to companies like Apple or Microsoft. Wanna sell songs using the AAC format for the iPod? Gotta go through Apple. Wanna sell songs using the WMA format for the Zune? Gotta go through Microsoft.

Music majors seem to be interested in cutting deals with as many online retailers as possible (that might eventually include iTunes, as much as the music execs hate Steve Jobs). Why? Because the widespread use of legal MP3 erodes online music stores competitive advantage over each other. It shifts the power to the music majors. When music companies wanted to raise prices for hit songs, Steve Job was able to convince them otherwise because he holds the key to iTunes which held the key to the iPod. But if there are several online retailers who can all sell songs for the iPod and have very little to differentiate from each other, the music majors have much more bargaining power. As long as at least one store agrees to jack up the prices as they desire, they can afford to shun the stores that don't.

So what we're witnessing is a change from a highly integrated model (Apple providing all the components but the songs themselves) to a more horizontal one. Eventually the online stores will compete on price alone. Considering that the incremental cost for a digital song is pretty much zero, this means they are likely to end up with razor-thin margins while the music majors reap most of the profits.

Now, if you recall, when entering the music market, Microsoft initially embraced the horizontal model with its own operating system and music format on one hand, and 3rd party MP3 player manufacturers and online retailers on the other hand. Unfortunately for Redmond, the customer experience was far less smooth as Apple's integrated solution. Will the same problem happen? It's actually a moving target. On the one hand, the adoption of the MP3 standard greatly simplifies the workflow. Retailers provide a MP3 format knowing it will work with any MP3 player, and don't have to worry about compatibility with Microsoft's latest specs (which was the problem with Microsoft initial strategy).

On the other hand, thanks to Wi-Fi support, the latest iPods can now download songs directly from iTunes without having to download them first on a computer. Future will tell whether retailers like Amazon can add plug-ins to the iPod to provide a smooth Wi-Fi integration. But for now, most iPods do not support Wi-Fi, so Amazon's current integration is just good enough for most people.

In the meantime, the music execs must be ecstatic at the thought of breaking Apple's control of what legal song is played on the iPod. For the time being the prices are likely to decrease as retailers start competing with each other. But one can bet that, when they feel they have enough power, the music execs will push again for a huge price increase for the hit songs. Unless they believe that breaking customers' expectations (i.e. getting used to pay a buck or so a song) can actually hurt sales.


Post a Comment

<< Home