Hi Tom,

One thing you overlooked is the experimenting with subscription models
(Rhapsody, etc.) and ad-supported models (SpiralFrog, et al.).  When Napster
first hit, everyone and their mother was advocating either or as a way to
get people to pay for digital downloads.  Today, the first is a footnote and
the second one is a total failure.


On Thu, Apr 22, 2010 at 6:14 AM, Tom Fine <[log in to unmask]>wrote:

> Just got an e-mail from Deutsche Grammophon's DG Web Shop online store that
> they are moving into
> Universal's company-owned online store system, moving away from the 3rd
> party operator who had
> handled the store backroom and fulfillment operations. I interpret this as
> proof that Universal has
> become comfortable with selling downloads directly to consumers, cutting
> out the middleman. This is
> probably necessary for survival as the CD format dies off. If a download
> song can only be sold for
> 99 cents, and most songs don't get downloaded very often (the "long tail"),
> then the smart music
> megaglomerate must capture as much of that 99 cents as possible. Paying
> Apple or Amazon a large
> percentage to handle marketing and backroom doesn't produce enough cash to
> justify the
> megaglomerate's existence. My bet is, going forward, iTunes store and
> Amazon will lose most of the
> major-label content or will have to take a much-reduced cut of sales, with
> most of the pie returning
> to the copyright owner. In the case of Amazon, an argument can be made that
>  it costs less to
> provide a download service than to pay people to warehouse and ship CD's,
> so therefore the copyright
> owner is due a better cut -- unknown whether this will wash with the
> business-savvy Amazon.
> Which makes me wonder -- perhaps someone who owns or works for a music
> label on-list can answer
> this -- does Amazon take the same percentage for digital downloads as for
> physical CD's? Someone
> told me, years ago, that the markup on CD's is about double, so the label
> gets about half the retail
> price. This might have changed, because I think I heard this during the
> collusion years when CD
> prices were higher. I think I read somewhere early in the iTunes days that
> Apple takes a 1/3 cut for
> iTunes downloads, maybe more.
> Anyway, it's interesting (to me at least) how far the market has evolved
> since iTunes hit the scene.
> 1. phase one - MP3 downloads were unsanctioned by the copyright owners, and
> almost all were piracy,
> the Napster heyday.
> 2. phase two - Napster shut down, crackdown on consumers, DRM formats,
> eMusic and other small
> operations emerge offering legit downloads of DRM-free MP3, but not from
> Universal, Sony or Warner.
> Content mainly from Fantasy Group and smaller labels.
> 3. phase three - iTunes hits the scene, complete with distribution deals
> with most major labels,
> everyone on board soon after. Original format is DRM proprietary and very
> lossy, but evolves to
> DRM-free less-lossy Apple proprietary format. Amazon soon joins the party
> with DRM-free less-lossy
> MP3 downloads, usually for less money than iTunes when priced on a
> whole-album basis. There is much
> overlap between Apple, Amazon and eMusic, but not 100%, and some eMusic
> downloads are still very
> lossy (not upgraded from original 128kbps offerings).
> 4. phase four - the labels dip their toes into selling directly or at least
> directing consumers
> directly to download sites. I would assume this coincides with the death of
> brick and morter retail
> stores, so labels no longer have to worry about teeing off distributors and
> rack-jobbers.
> Universal/Verve was early with this, with the Verve Vault website where you
> could click and buy the
> out-of-print albums right from iTunes. Other models are like DGG's, where
> consumers can buy
> high-bitrate MP3 directly from the company's website. Smaller labels got
> early into offering
> downlaods direct to consumers, sometimes including booklet materials, and I
> now notice that some
> small labels like Daptone are offering FLAC downloads of full CD resolution
> at a decent discount to
> buying the physical CD. This makes total sense for anyone who doesn't own
> CD plants -- the margin is
> probably better than paying to have CD's made and then distributing and
> holding inventory.
> 5. phase five - around the same time as phase four, a niche market emerges
> for better-than-CD
> resolution PCM downloads. HDTracks and Linn, plus some others, are first in
> this market. Pricing is
> comparable to suggested retail for SACD. My bet is that this absorbs the
> SACD niche as the physical
> format submerges.
> I think the end of 5" optical discs is inevitable, but it will be a slow
> fadeout. Also, it seems
> obvious that there's a lot of excess inventory in warehouses and in the
> retail pipeline, so it will
> take years for most titles to completely disappear (much less time for
> popular titles). Also, it
> will probably make sense for megahits to be issued on CD for quite some
> time. I think the back
> catalog stuff is definitely headed out of print, though.
> One man's analysis ...
> -- Tom Fine