Total Music Threatens Apple’s Music Distribution Revenue

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.

Comments

[jswede:]

"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."

"Disclosure: SmartGuyDH does not own shares of AAPL."

enough said.

2007 Oct 23 04:17 PM

[SmartGuySto...:]

For those below who have married AAPL, go to iTunes and search for Radiohead.

It is entirely possible to succeed without iTunes. And the more music is free or pay-what-you-want in other places, people will download elsewhere and import to iTunes to use on their iPod ... Free.

2007 Oct 23 05:46 PM

[SmartGuySto...:]

For those below who have married AAPL, go to iTunes and search for Radiohead.

It is entirely possible to succeed without iTunes. And the more music is free or pay-what-you-want in other places, people will download elsewhere and import to iTunes to use on their iPod ... Free.

2007 Oct 23 05:46 PM

[jonesy:]

Radiohead has already been exposed as a cynical ruse. The digital download was of poor quality, included no liner notes or album cover. And Radiohead was quoted as saying that this was intended to get people to buy the higher-quality CD. Cynical.

But do let me bring up Hannah Montana/Miley Cyrus as an example. The TV show and music which is played on Disney Radio, disney.com, and Disney Channel over and over, could be seen as marketing to get people to go to her concerts, which are pretty much sold out with tickets getting scalped all over. Or High School Musical could be seen as marketing to get people to go to the play. And they could give it away at disney.com or at iTunes.

So yes, it is possible to succeed without "selling the music", and that's what the labels need to do - be creative.

2007 Oct 23 08:00 PM

[Jon T:]

Love the suggestion that Apple creates its own label and gives 79c to the artist.

Bingo, problem solved.

2007 Oct 24 10:36 AM

[John225:]

From reading this article, I would say you were paid by the labels to write it in their support.

The Labels' proposition to bury the cost of the subscription in the hardware's cost is the most ridiculous that I've ever heard. At $5 per month, it's $90 per year. How can such a number be buried in the price of a player like the iPod Nano (if Apple were crazy enough to go along with such stupidity) that costs $149? And what about the second year? Are players going to be designed to be disposable? Do they simply stop working after the first year until the user coughs up another subscription fee?

The performance of Apple vs. all the other music player makers who were pushing playforsure crap and pushing subscriptions has already proven to any reasonable person that the majority of people don't want subscriptions. They don't want to keep paying.

It is understandable that the greedy labels would love a guaranteed perpetual stream of income. And they're obviously salivating at the idea of having people pay for the privilege of listening at the labels' terms. They would love to implement such a system that forces anybody to pay and later on they can increment the cost of their subscriptions to guarantee an ever increasing income.

Unfortunately for the labels they're living in the real world, not in a dream world where money simply falls in their laps. It seems that they've yet to learn that to earn money, they need to give people what people are willing to pay money for.

2007 Oct 24 03:03 PM

[Yodarick:]

and the score is : Mark2005 3, Not so SmartGuy 0

Didn't your daddy ever tell you nothing is for free, $90 a year is not free, it is paying $90 a year to listen to the radio where I can choose the songs. At the end of the year I have exactly what I started with, nothing.

I was once 30 myself and just like you I thought I had all the answers. I want to own my music, play it when ever I want on whatever I want. The problem with the music companies is that someone took away the key to the gold mine and their reason for being is no longer valid.

The future is digital, the artist records his music, retains control, distributes it directly to iTunes or whoever and is paid directly for it. No middleman, no fat executives. And guess what this can all be done on a Mac today, that's right Not so SmartGuy, today.

iTunes is an experience, no just a place to buy music, there are podcasts, tv, film shorts, movies (comming), and now iTunesU which is really free.

I know where I'd put my $90

2007 Oct 24 06:23 PM

[WiseGuyStocks:]

This article sounds to me like it is written by someone who does NOT own apple stock, BUT wishes they did!

2007 Oct 24 10:05 PM

[mashny:]

There's a point that many of you are missing: Regardless of where people get their digital music from (and I believe most "legitimate" music will continue to be purchased from the iTMS), on what device do you think that music will be played? Chances are roughly 70% to 75% of that music will be played on an iPod. Apple gets a very small percentage of its iTMS sales, using the iTMS as a vehicle to sell the iPod. Regardless of where the music comes from most music will be listened to on the iPod. Thus, even if the iTMS suffers from lower sales over the coming years, the iPod will continue to be the dominant player. Either way, Apple wins.

If another company can come out with a better line of players, with greater ease of use, more power to them, but I don't see that happening any time soon. Those players will have to be better than the iPod, not "as good." As Emerson said, "Shakespeare will never be made by the study of Shakespeare." What are the chances of another company making a better line of music players, that are as aesthetically pleasing, as versatile, as intuitive to use, and as well integrated with some form of downloadable music service? In my estimation, roughly nil. Apple owns the legitimate downloadable-music arena and will continue to do so for a long time.

2007 Oct 26 09:14 PM