Recent deals, such as Bertelsmann's investment in Napster and Listen.com's offer to buy Scour's assets, indicate that the music industry and Web distributors are waking up and facing the Internet music.
In effect, Web companies are growing up and recognizing that they need real business models based on real business rules. We expect to see a lot more rationalization like this between Web and traditional companies as the Web companies look for ways to survive.
Traditional music distributors are realizing that new, Web-based business models have huge advantages in terms of saving distribution costs, eliminating middlemen and inventory-management challenges, and finding potential new customers. While traditional music media such as CDs and tapes will not disappear soon, they will not be growth markets and will fade over time.
The music and book industries need to move away from their traditional pricing models of $15 or more per CD or hardback book and think more in terms of 20 cents per song or $5 per digital book download, recouping the cash flow on higher volumes. They may even end up making more money.
The key to those greater sales, however, is realizing the real value in the new Web-based business model, which is its unique ability to develop invaluable information about the audience that can then be used to target marketing to specific areas.
We believe the music industry was incredibly shortsighted to sue Napster and Scour. The information Napster gathered on the demographics of its audience was much more valuable than the recordings it "stole." Napster knew exactly who the customers were for each of the artists it carried. It would cost the recording industry millions to duplicate that database, and that is the key to success.
Viral marketing and file-sharing business models will become more important--one reason Bertelsmann bought Napster was to tap into its viral marketing method. Sites may sell subscriptions that give buyers access to everything on the site for a limited period of time, or they may provide one-time downloads at a much lower price than that of a printed book or CD to reflect the lower manufacturing and distribution costs. Sites may sell music by the cut rather than by a CD-like compilation, enabling individuals to build their own song collections.
To some extent, these new models will be driven by new pervasive computing devices--people will read books and listen to music on personal digital assistants and other portable devices and watch movies on portable, battery-operated DVD players or electronic clipboards.
These models will require the industries involved to develop policies on digital rights and infrastructures to protect their investment in intellectual property. We anticipate that, as new, Web-based business models for intellectual property evolve, they will support the digital asset management companies that are beginning to appear.
Compensation for the artists will have to change as well. Instead of being paid in a lump sum up front, they will need to participate in the revenue stream more purely on a royalty basis.
Publishing companies should try out new Web-based business models while they still have large revenue streams from traditional sources. That will enable them to prepare for the inevitable day when a large portion of the listening, viewing and reading public gets its music, movies and books via the Internet.
The bottom line is that traditional music, book and movie distributors must adapt to Web-based distribution models or face constant guerrilla warfare from people who create Web start-ups with little investment.
META Group analysts Dale Kutnick, Peter Burris, Jack Gold, Val Sribar, William Zachmann, David Cearley, David Yockelson, Kip Martin, Mike Gotta, and Andrew Warzecha contributed to this article.
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