12. March 2008 by Martin Suter.

I find it fascinating that many market disruptions are not technological, but rather business models enabled by technology. What happens when there are no barriers to entry? What happens in a world with no friction? What happens when customers can interact directly with sellers?

Dell shook up the PC industry by first selling direct to end-users. Google has gone from a Search engine to the dominant force in advertising, and along the way has figured out how to do "free" very well. eBay brought the garage sale to the world. And finally, recording artists are realising that there’s money to be made selling direct to your fan base, without compromising your artistic integrity.

Nine Inch Nails just released a collection of 36 songs, called "Ghosts I-IV". MSNBC.com suggests that "2008 may go down in history as the beginning of the end for the recording industry." I beg to differ. It’s been like watching death by 1000 cuts in slow motion. 2008 is hopefully the year where the final nail is hammered into the coffin, a nine inch nail.

Where did it all go wrong for the music industry?

Record companies are licensing companies. What is a "record deal", if not a license granting rights to an artist’s intellectual property to a record company along with the rights to make or have made physical product, the rights to distribute and sell this IP in return for a royalty rate paid to the creator of the IP. For decades, they held the keys to the kingdom. Barriers to entry were high…Studio time, production and mixing equipment, analog master tapes were expensive, manufacturing, promotion to radio stations, and distribution channels…The studios had a wonderfully integrated system, but it was a closed system. The only way that an artist could get a record on somebody’s turntable was to play within the system, by their rules.

Video may have killed the radio star, but digital is what killed record companies.

The shift from analog/vinyl to digital was the first nail in their coffin. Cheap, ubiquitous broadband was another nail. Napster got people used to downloading content and not having a physical instantiation of the music (i.e. a CD) and was another nail. MySpace and other social networking sites facilitated the viral promotion of artists; another nail. YouTube further helped them distribute music videos and concert footage; another nail (This one in MTV). Apple bundled GarageBand with the MAC, enabling anyone to produce decent quality music quickly and cheaply; yet another nail. iTunes and the iPod gave us a means of storing and cataloguing our music, eliminating the need for a home stereo system or physical form factors; another nail. iTunes gave us a means of purchasing music that no longer required a trip to the mall; the eighth nail in the coffin.

And in the past year, major artists like Radiohead and now Nine Inch Nails selling direct to their fans. Hopefully, the ninth and final nail.

In his book, The Long Tail, Chris Anderson articulates how in a world without friction (i.e. the Internet), even those with the most arcane tastes, can find something they want, growing the overall size of the market. He posits that there is more money to be made across the entire breadth of the market, as opposed to a narrow, deep market as the music industry used to be.

The music industry isn’t dead, record companies and MTV are.

But have we, as consumers, ended up winning or losing in this deal? I would suggest that we’ve won big-time.

Trent Reznor, from NIN comments on Ghosts I-IV: "The end result is a wildly varied body of music that we’re able to present to the world in ways the confines of a major record label would never have allowed…"

The probability of my selecting a Nine Inch Nails CD and paying $15.95 to see whether I liked it or not would have been pretty small. Or Radiohead for that matter.

But give me a chance to experience and experiment with new tastes in a low-risk way, and I’m all over it. Does it get any better?

That’s my .02!

Martin Suter

(martin.suter@iplicensing.net)

Posted in Music, Disruptive Technology, Internet, Licensing | Print | No Comments »

18. February 2008 by Martin Suter.

It’s only 849 miles from Redmond to Palo Alto, but that might as well be light years.

An article in today’s New York Times asserts that the biggest hurdle in the integration of Microsoft & Yahoo will be the clash of cultures. I think they’re being politically correct. It’s bigger than that. It’s a religious war.

During the mid-90’s, I was fortunate to have a front row seat as the Internet took off. Whether it was sitting in meetings with Mark Andreesen and Jim Barksdale or sharing a stage with Scott McNeely in front of thousands of fans, it was heady stuff. I spent 1995-97 within the “ABM” alliance (Anything but Microsoft), and bought into the standard Valley exhortations that Redmond represented “the dark side”.

But in late-1997, things changed for me. I joined another early-stage start-up (FastLane), was given a blank sheet of paper, and the vague task of creating a strategic alliance with Microsoft. My first visit to Redmond was in October 1997, and I will admit that the hair stood up on the back of my neck. I felt like an impostor and wondered whether I had really crossed over to the dark side.

As we took the company from zero to Active Directory poster child over the next 3 years, I spent between 2-3 weeks/month on campus, working across the organization. By the time FastLane was acquired in Q3/2000, I was as deeply embedded in the Redmond culture as I had been in the Valley’s just a few years previous. I was able to expound on Microsoft’s position on the DOJ anti-trust lawsuit and its .NET strategy in great detail. I had drank the Microsoft Kool-Aid. Perhaps I had been assimilated.

So what of the Yahoo takeover?

The average Yahoo employee has gotten out of bed every day believing that Redmond equates to the dark side. Their peers, with whom they drink at Gordon Biersch or against whom they play Ultimate, all believe the same thing. They have spent their careers trying to disprove that “Resistance is Futile”. So how do you convert someone for whom the battle has taken on quasi-religious overtones? A more fundamental question is “Should you?”

As I have stated in previous posts (“The Open Source Red Herring”), I have a ton of respect for Microsoft and that many in the Valley hide their motives behind the pseudo-altruistic cloak of “open source”. However, I would also suggest that, perhaps, Microsoft has met its match with the Internet. It’s been difficult to watch from the sidelines, as Microsoft has touted web architectures and web services (.NET) for a decade now. But there has been a tremendous disconnect between its words and its actions in this regard. It’s easy to see why, as the Web is potentially disruptive to its 2 most profitable franchises: Windows and Office.

But unfortunately, when Microsoft takes a close look in the mirror, it must admit to itself that it still struggles to “get” the web. Salesforce.com got the web and the power of SaaS. Google got the web and the power of advertising. Yahoo got the web and the stickiness of subscriptions. Add in Facebook, YouTube, and most of Web 2.0, and Microsoft doesn’t even earn “fast follower” status.

Perhaps its failure, to truly lead on the Web, is cultural and, ultimately, intractable. Perhaps the gravitational pull of the web in the Valley is too strong, even for Microsoft, to try and move it into its Redmond orbit.  Spinning out its Internet properties with some cash, and merging with Yahoo rather than trying to assimilate it into Redmond, may be Microsoft’s wormhole through cyberspace.

The answer may lie, not in bringing the Valley to Redmond, but in carving out a piece of Redmond, and letting it leave home and move to the Valley.

That’s my .02 for today!

Martin

(martin.suter@iplicensing.net)

Posted in Yahoo, Internet, Microsoft | Print | No Comments »