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Archive for August, 2009

The Internet Destroys Profits

The Internet is a force that levels communication, distribution, information, and access. Controlling these four things has been the foundation of business.  In the past if you could control one of these things better than your competitors, you had an advantage. The Internet removes this advantage, and thus, levels money out of practically every industry it touches.

It is my opinion that both the individual and humanity as a whole benefits from the Internet. I also think that particular businesses have capitalized on the unique opportunities the Internet presents.  From a macroeconomic standpoint I worry that the net result of the Internet has not been positive for business.  As the Internet increases efficiency, the efficiency creates unmanageable data overload. While it drives down costs, it also drives down profits.  It increases communication but it demands instantaneous, around the clock responses.  It allows for quick and cheap distribution, but the distribution channel can no longer be controlled. Digital files can be infinitely replicated at zero cost, but it drives down the value of the contents to near zero.  It provides businesses with vital information, but that information is also available to competitors and consumers.  It gives us access to the world, but it prevents anyone from restricting access to anything.

It's clear that this has happened with music, movies, television, print, cable, auto, telecom and real estate.  I'm sure there are dozens of industries that have not had their profits ground out by the Internet.  I

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would theorize that this is only because the Internet has yet to set it's sites on that industry.  Where the Internet touches, profits shrink.  You can think that your industry will be exempt, and you might be right. Chances are it will be swept under; it's only a matter of time.

This may seem like an odd thing to say coming from someone who is a proponent of the Internet.  The Internet has reshaped the business landscape and redefined the profits that can be expected.  It doesn't seem like the business world has fully adjusted their expectations.  I keep hearing the question asked, “How can X industry return to its former level of profits?”  In response the industry inevitably tries to generate more revenue with the same business model and it doesn't work.  It's possible that once the Internet touches an industry, pre-Internet revenue levels will never return.  The only solution is to change the size of company so it is in line with the profit potential.  For example, you don't need a massive building with hundreds of employees to sell music.   It is very likely that this is the dawn of the small business age.

Of course, there is the chance that for every industry with destroyed profits, there is an entirely new business model that the Internet has enabled.  At the moment, the Internet may be a net negative for business because those new possibilities have yet to be realized.  What's more likely is that some industries will discover a new model, but most will have to reorganize around adjusted expectations.


Wrong Lesson: Music is not an indication that content must be free.

Whenever someone talks about content and the idea that nobody will pay for it, they implicitly reference the fate of the music industry.  Music started us down this path by showing us what can happen when an industry does not adapt to the Internet.  Unfortunately, the lesson everyone took away was that people aren't willing to pay for content.

Music absolutely does not have to be free and people are more than willing to pay for it.  What people are willing to pay, and how they want to consume it has dramatically shifted.  The music industry's downfall was that they never adjusted their own perceptions on what music was worth.  To this day, 10 years after the release of Napster, they have yet to accommodate the new pricing structure and format the consumer demands.

P2P gave people unlimited, unrestricted access to the worlds catalog of music. It's a beautiful achievement, almost poetic, and the music industry underestimated just how important that was to people.   Back then, what if people had been given the option to pay for Napster exactly as it was?   The worlds music had just been opened up to everyone, the RIAA was actively trying to shut it down, and there was a credible threat that they may start suing file-sharers.  Before they nailed the coffin on Napster, what if they music industry had said, okay, you can do this, but it's $20/month.  I believe that almost everyone would have paid.  If you were a kid, your parents would have paid just like they pay for cable.  If you were a student the university would have paid to avoid a lawsuit.

Napster did relaunch as a paid service and nobody was interested.  People were uninterested in paying for a service that was inferior to the original Napster.  It cost $20/month for unlimited downloads, but if you ever stopped paying the subscription the music disappeared.  Not only that, it didn't work with the iPod.

If people would have paid for the original version of Napster, what about a clean, organized, virus free version? What about iTunes priced $20/month instead of $1 per track; download as much as you like.

Do you spend $20 per month on music? Does anybody you know?  In the heyday of the CD industry if you were the the type of consumer that bought one CD per month you were a gold-mine.   Columbia House was an entire business based on mailing you one CD per month and it made a fortune.  The only thing stopping the music industry from getting back

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to the equivalent of one-cd-per-month for every music fan is moving to an all-you-can-eat subscription model.  Download all you want, play it on any device, keep it forever.  They would get to keep the entire $20 because there is no physical disk to press, no shipping costs, and no store.

The artist would be paid on attention. All of the money from the subscriptions would be split up based on what percentage of overall downloads each artist commands. If you're an artist that can get everyones attention, then you'll get a lot of the pool.

The music industry is incredibly fortunate to have their consumers tell them their business model.  They want unlimited, unrestricted access to music.  Simple.  Provide it and make money.  There are multiple indicators that people are willing to pay for this including bigger hard-drives, faster Internet connections, iPods, iPhones, and the expensive risk of a lawsuit. Entire industries are cashing in on this desire and the music industry is missing out.

If this really is the answer then why doesn't the music industry just do it?
1. The three companies that own the music industry can't seem to work together, and you need everyones buy in.
2. Those three companies have abused their artists for so long that they can't work with them to rewrite every contract to accommodate this new model.
3. The music industry has yet to shift their perception of what music is worth
4. The music industry is setup to sell CDs and as a result they are more comfortable with digital models that are similar
5. If an artist on a small label can compete on the same field with an artist on a big label, then their oligopoly is over

My suggestion would be to fold all the labels and start from scratch.  What's more likely is that new artists will refuse to sign with the major labels.  When there is a critical mass of top artists that aren't controlled by a major label, the smaller labels will band together to make this happen. is in the best position to bring about this change.

What's important is that we do not take away the wrong lesson from this.  Newspapers, movies, content, and web apps do not have to be free.  People are willing to pay for content, but it has to be instant, unlimited, comprehensive, and organized. The music industry failed because they couldn't adapt to this new model, not because everyone demands free.


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