TCS Daily

Listen to the Technology

By Arnold Kling - April 18, 2002 12:00 AM

The future is here. But distributors of music have tuned it out.

Technology has made the CD-centric business model of the music industry obsolete. Fifteen years ago, the CD became the superior alternative medium for storing and transporting music. Today, though, disks represent the truly low-cost storage medium, and the Internet represents the low-cost transportation medium for delivering music to listeners. In short, something like Napster was inevitable.

That music has become much cheaper to store and to transport would be good news for the music industry, if they would listen to the technology. Instead, they cannot seem to bear the thought of a transition away from the CD-centric business model. Like the people in a 1960's cigarette commercial, the industry would rather fight than switch.

The music industry's court victory over Napster was symbolic, but no judicial ruling can overturn the fact that downloading songs over the Internet is more efficient than purchasing them as recorded CDs. The industry's next idea -- a bill authored by Sen. Ernest Hollings to try to outlaw technology that can be used to make copies of creative works -- seems destined to replace "Luddite" as an expression to describe a pathetic, irrational attempt to forestall the future.

Who Needs CD's?

Let's pretend, though, that the CD didn't exist. How would music makers try to deliver their music today?

I believe there would be two modes of distribution.

First, music could come packaged with hardware, much like most software is packaged with computers today.

In the past, that might have been too expensive. But in a world with cheap, high-capacity hard disks, any system with stereo speakers could, and should, come complete with recorded music. Not just computers, but all car and home stereos as well. A reasonably priced hard disk can store all the music that you have time to listen to, and with several more iterations of Moore's Law a disk will be able to store everything that has ever been recorded.

With pre-installed music, the music industry would make money like Microsoft. Original Equipment Manufacturers (OEM's) would pay music distributors for licenses to their collections. At first, because hard disk capacity is not unlimited, people would have to choose standard music packages and pay extra for custom collections. Eventually, just as the Evil Empire bundled more and more functionality into the operating system, the standard music packages would include more and more of what has been recorded.

How would the music companies do under such a distribution scheme? Well, suppose that each year in the United States sales of car stereos totaled 15 million units, personal computers for home use totaled 60 million, and home stereos totaled 25 million units. Then, if the music industry collected an average $100 license fee for the installed music on each product - a price well within the range of many consumer software packages- it would have $10 billion in annual revenue. This would nearly equal the revenue from CD sales today, but with much lower production and distribution costs.

Be Like Bill

A second method of music delivery would be through third-party developer licenses.

The software industry has learned that open systems that encourage third-party developers are more profitable than closed systems. I would argue that Microsoft and Apple are where they are today because Apple did less to encourage third-party developers. (Not that I want to plunge into the Apple-Microsoft debate here.)

Tim O'Reilly recently made an important pronouncement about the need for Internet companies, such as Google and Amazon, to create open interfaces to their data that would allow third-party developers to add value. No sooner was his article published than Dave Winer breathlessly reported that Google is doing exactly that.

Google is giving third-party developers licenses to access Google's catalog. Eventually, for high-volume licenses Google will charge a fee. Presumably, the high-volume applications will have revenue models attached to them.

Suppose that, like Google, a music distributor published an interface to its catalog, so that anyone could download music. Any third-party developer could obtain a license to access the catalog to create a play list, operate a radio station, create an algorithm to match people to music that suits their taste, or other value-added services. The developers would pay a license fee based on the intensity with which they access the catalog.

Subscription services, with revenue shared among third-party developers and music publishers, would be another revenue stream for the music industry. Consumers might pay low annual fees in order to be able to download a small number of songs. Third-party developers with high-volume services would pay higher fees. All in all, one can imagine 60 million subscribers paying $60 a year, plus 10 million subscribers paying $150 a year for premium services (more download privileges, custom music recommendation services, priority for concert tickets), for another $5 billion a year in revenue.

What about the Individual?

Suppose that the CD were to disappear and be replaced by these alternative revenue models. What does this scenario mean for individuals?

The music consumer would be paying flat fees for unlimited use. When you obtain a stereo with music installed, you pay a one-time fee embedded in the cost of the stereo. When you subscribe to a music service, you pay an annual fee for unlimited use of the service. I think that most music-lovers would gladly pay these modest flat fees in order to save on CD purchases and to enjoy the convenience of listening to whatever music they want whenever they want to listen.

Musicians and composers still would need to get paid. I am assuming that they would continue to be paid by the intermediaries in the music industry. Music distributors would pay musicians in order to keep their catalogs popular.

Of course, the nature of intermediation could change. Anyone who obtains the rights from artists and sets up a hosting service with a catalog and an interface could play the role of a music publisher. The third-party developers could access this catalog. Those developers might turn out to be the critical intermediaries, and they could end up paying musicians.

I suspect that fear of this sort of industry change -- and the potential loss of control -- is what is driving the behavior of the music industry today. However, eventually they will have to listen to the technology.


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