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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