At the turn of the millennium, file-sharing sent the music industry down for the count with an unforeseen brick-fist upper cut to the chin. The dizzied heavy weight champion regained consciousness by the one or two count, but the extremely unfamiliar state of affairs coupled with a primal fear of impending doom caused record industry executives to reach for a miracle. While the industry was on its knees, a glorious radiating image of a savior emerged from the trainer’s corner: Steve Jobs.
Jobs stepped in at the perfect moment. Record labels were stunned, incompetent, and as vulnerable as a terminally ill patient in a room full of “cure” salesmen. I imagine Jobs said something like, “I can stop the bleeding. I can help you up. If you work with me on my new iTunes platform, you will win this bout against those file sharing thieves.”
Many meetings and legal accounts payable later, Apple’s (AAPL) iTunes began plugging the massive deep wounds and restoring revenue back to record companies. Fast forward to 2006. Record companies are back on their feet and can see the transition to digital may not be fatal after all. In fact, a bit of hubris has returned to the huge corner offices of the major labels. Like any great narcissist, record executives are ready to ditch their savior and fight according to a new plan.
The first step in ditching the successful trainer Jobs has been a strong branding campaign to redefine Jobs from savior to sinner. Press popping up like switch grass has refocused the record industry’s fight from file sharing thieves to the extortionist distributor named iTunes. Leading the campaign is Universal Music chief Doug Morris. The former born-again follower of everything-Jobs is now rounding up the other major labels (which control 75% of the music owned in the U.S.) to launch a record company-owned subscription platform that will bake the cost of music into the price of hardware or cellphone fees. Sounds like the industry’s incompetent execs are following tradition by simply moving from a Job’s envisioned world to one prophesied by music production guru Rick Rubin (who several months ago explained this exact label-owned platform in an interview with the New York Times).
This new platform, Total Music, is actually the first viable alternative to the ubiquitous iTunes. We finally have someone who understands that making music “free” (i.e., my music player or cellphone allows me to download unlimited music from Total Music at no additional cost) to the consumer is tempting even to the most loyal Apple fans. In fact, the idea is so sound that for the first time in 5 years I am moving from AAPL mega-bull to fence-sitter.
If Total Music gains a reasonable percentage of digital market share, AAPL will be forced to either take lower distribution fees or possibly lose content completely. Both these outcomes will significantly reduce Apple’s revenue from music distribution. Thus, shares could suffer some multiple contraction as analysts begin readjusting models to reflect less favorable distribution margins.
We have a while to see how this plays out. Total Music is not a tangible product yet. As my previous article at SmartGuyStocks pointed out, record companies are also heavily distracted by marquee defections such as Radiohead and Madonna. However, if the same type of sinful greed that injured the record labels spreads too far into the savior’s camp, AAPL may soon lose its Don King-like monopoly in the music business.
Disclosure: SmartGuyDH does not own shares of AAPL.