Dollars Become Dimes, Dimes Become Pennies, Pennies Become…???

Of course, speculation continues to fly out of every conceivable channel and orifice re: what Apple's acquisition of Lala.com means. Yesterday the Wall Street Journal tried to get a grip on what some of us have been anticipating for more than a decade – that the Celestial Jukebox is coming whether we like or not. And with its acquistion of Lala, now Apple will have a pivotal hand in expediting its arrival:

ITunes-LalaWhere Apple's iTunes requires users to download music onto a specific computer, Lala.com lets users buy and listen to music through a Web browser, meaning its customers can access purchases from anywhere, as long as they are connected to the Internet.

Apple is considering adopting that same model for songs sold on iTunes, a change that would give consumers more ways to access and manage their iTunes purchases—and wouldn't require them to download Apple's software or their purchases.

That is potentially great news for consumers.  And potentially devastating to the remaining vestiges of the recorded music industry. 

So let us (quickly) review the history of digital music distribution over the course of the past decade, and speculate a little further about what this means for the decade that arrives in a couple of weeks:

First (well, we gotta start somewhere…), there was Napster in the summer of 1999, which for the first time demonstrated the ultimate potential of digital music delivery.  The critics and nattering nabobs at the time all screamed Armageddon because Napster was "free" (i.e. stolen).  They missed the point, which was that Napster was the first service that demonstrated the promise of "whatever you want, whenever you want it."  The issue was not cost, it was access. 

In 2003, Apple opened the iTunes store, which "unbundled" all the tunes on a CD and offered them for paid downloads at 99c per track. iTunes took the complexities and unreliability of file-sharing services like Napster and made it all simple and reliable, and that made the downloads worth 99cents to an exploding new market.  

But the real disruption in iTunes was not the price or convenience, it was the unbundling, which brought "whatever you want, whenever you want it" one step closer. 

With iTunes, if there was only one song a consumer wanted from any particular CD, that was all he/she needed to purchase.  And with that, the price point of $15 for a typical CD was reduced to a single dollar.  The price for music was reduced by a factor of (actually, more than) 1/10th:  dollars became dimes – and the recorded music industry started going into the proverbial dumper.

Fast forward to the fall of 2008, and an online CD-swapping service called "Lala.com" launches a streaming music service.  Contrary to the iTunes  model of offering "30 second clips" for sampling, suddenly users can listen to whatever they want to, in its entirety, the first time for free.  If you want to listen again, you shell out a dime per track and have unlimited access to that track via Lala's cloud-based server and your browser (which signal can easily be sent to your stereo).

Now it is late 2009 and Apple —  the company that sent the recorded music industry down the slippery slope of rapidly and steadily declining revenues by changing dollars into dimes — has acquired Lala, the company that reduces those dollars into pennies.  Suddenly the song that cost me $15 a few years ago because I had to purchase it on a CD along with maybe nine or ten other songs I might not have wanted, the song that I could get from iTunes for a buck… I can now get for a mere 10cents. 

And so, again, the question: this all sounds great for consumers, but what's it going to mean for the producers? 

In days of old, when knights were bold, and the toilet that the recorded music industry is now swirling into had yet to be invented, one pillar of the business model was something called a "mechanical royalty."  That means that every time a song was reproduced in some mechanical medium (cylinder, disk, CD, download), the composers and their publishers are paid, by law, something like 9cents.  Careers and publishing empires have been built on those pennies.  

But in the business model that Apple now seems ready to embrace, those pennies disappear altogether because there are no copies.  There is only the one original copy that is accessed by through the cloud by whoever wants to hear it.  

I mention the mechanical royalty here because it represents the most endangered species in this impending paradigm shift.  The 9cent mechanical royalty is in a sense a proxy for all the revenue that recordings generate (which perhaps suggests why its rate is mandated by statute).  

But in a world where there are no copies, the mechanical royalty becomes irrelevant.  The Harry Fox Agency (the National Music Publishers Assn, named for a former president, which collects mechanicals on behalf of its members) is, in a word, doomed.  

In lieu of the mechanicals, it is presumed that some kind of "performance" royalty will be collected by the performing rights organizations (ASCAP, BMI, SESAC, Sound Exchange, etc.)  

And with that, we can all breathe a sigh of relief,  considering the recent news that European streaming service Spotify recently paid Lady Gaga a whopping $167 for over a million streamed "spins" of one of her songs.  

How many ways are there to say the word "doomed" ? 



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Paul S