music industry nobs have finally

The music industry nobs have finally figured out what we're doing

So you've no doubt seen this story or one like it explaining that

Universal Music Group won't renew its iTunes deal. And you've seen

people saying that the majors are trying to "recalibrate" their

relationships with us. Actually what's happening is they're crapping

in their pants. They woke up one day and realized that we've got 80%

share of digital downloads. Suddenly all the power in the value chain

resides in one player. Oops.

Here's the thing. These guys could have done what we did. In the early

days of the Internet, everyone figured the majors would build digital

distribution arms. But they didn't do it, because they didn't

understand technology, and they didn't want to invest in building this

expertise, and they were freaked out about piracy and paralyzed with

fear. So we stepped in. We made the big investment. We hired

programmers. We developed software that's easy to use and works

flawlessly. (If you think that's trivial, think again. It's huge.) We

ran the system. We promoted it, we marketed it, we haggled with all

the majors and struck deals. We took all the risk, which was

considerable. Now we're reaping the reward. And the majors want a

bigger slice. Um, for what? We did all the work. Ain't gonna happen,

slick.

Here's the back story. The music companies are in a dying business,

and they know it. Sure, they act all cool because they hang around

with rock stars. But beneath all the glamour these guys are actually

operating two very low-tech businesses. One is a form of

loan-sharking: they put up money to make records, then force recording

artists to pay the money back with exorbitant interest. The other

business is distribution. They've got big warehouses and they control

the shipment of little plastic boxes that happen to have music in

them.

The guys running the labels are pretty stupid -- most are just

dirtbags who started out as band managers or promoters -- but now at

long last they are kinda sorta finally vaguely getting clued in to the

fact that both parts of their business model are fucked. Their

loan-sharking business is being eliminated by low-cost digital

recording technology that lets people make an album for very little

money. And by letting us build the online music store they've taken

themselves out of the distribution business. In the days of vinyl and

then CDs, the labels managed to control the value chain by having

loads of retailers in a highly fragmented market, and playing them off

each other. In the digital world they've got us. And that's it.

Ironically the mistake the major labels made was the same one that IBM

made when it gave the DOS franchise to Microsoft nearly 30 years ago.

They were faced with a new market that they didn't understand. They

had a piece of work that they couldn't do on their own or didn't want

to do on their own and they didn't view it as critical or important,

so they outsourced it to a partner. The partner turned that seemingly

unimportant work into a way to accrue power and create a monopoly and

control the industry. Today in the music business we're about where

IBM and Microsoft were in 1989, when IBM finally got hit with the clue

stick and realized what Microsoft was doing.

How will it play out this time? I don't know, honestly. But I like our