Fighting disruption

28 Mar 2008

Let's talk disintermediation.

That's the fancy word for leapfrogging the middleman. The internet's ability to shrink distance means that if it's about anything it's about disrupting the middleman.

Just about every industry has been challenged by the internet in the last decade. Many -- travel agents and stockbrokers, for example - have been drastically disintermediated.

But the industry that has done it toughest of all is surely the recorded music business. As we all know, their product is being shipped gratis across the net. That maybe unfair, but it's also a sign that the RIAA and friends have dealt very poorly with digital disruption.

Many argue they lost their best chance back in 2000, when they could have done a deal with Napster, the MP3 company that hosted songs on its own servers. It was clearly a great opportunity either for litigation or a deal.

The industry chose litigation. Napster disappeared, giving the best possible fillip to P2P and the emergence of a whole generation of young people who not only don't buy CDs, but who don't believe in buying music at all.

It's hard to imagine a more catastrophic management of customer sentiment. And while the labels made poor choices, it's also a good lesson in disintermediation.

In partnership with radio stations, big music could traditionally make or break an artist or song. Consumers today have literally thousands of choices in online music and, because of their inability to manage the internet disruption, record labels are no longer the prime arbiters of taste.

But they still have great strengths in their catalogues and their ability to identify promising artists and material. And the opportunity is that consumers need help in sorting through the millions of tunes now available online.

In the past six years the labels have taken a backseat on the net as iTunes has become the dominant channel.

Now it looks like they are striking back with the kind of strategic deal needed to "reintermediate" themselves, namely the offer of unlimited downloads in return for a flat monthly fee.

The stimulant in this has been Nokia, which has developed an all-you-can-eat bundle with access to the Universal catalogue. Nokia is paying the label $80 for each handset shipped. Apple has been in talks on a similar deal, though reportedly willing to pay a lot less.

The CEO of Sony BMG Music has floated the idea of a flat monthly fee of around $9-$12 for unlimited access to its entire catalog. The downloads would be compatible with all players, including the iPod.

That kind of deal isn't going to wipe out illicit downloads overnight, but it's the kind of simple, one-stop offer that will grow online revenues, massively grow out the customer base and help marginalize piracy. It will give the shrinking labels a foothold in the future.

It might be the music biz, but it is still business.

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