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What the record companies learned from Apple - April 6, 2008

Billboard is reporting this morning that aspiring digital music services like SpiralFrog and imeem are being asked to fork over hefty upfront guarantees in exchange for streaming and download licenses from the major record companies, and in some cases have had to give equity stakes to their new content "partners." Imeem, for instance, is reported to have paid advances as high as $20 million and to have given the record companies equity stakes in the online venture. 

The story quotes Digital Media Assn. executive director Jonathan Potter saying the demands are "not helping build a business," and more condemnations of the "greedy" record labels are sure to follow. Another way to look at the issue, though, is that the record companies are merely applying lessons learned from their experience with iTunes, the most successful digital music service on the Internet.

The main record company take-away from dealing with Apple was that nearly all of the value created by the nexus of iTunes and iPods accrued to Apple. The music on iTunes was simply a means of creating value for iPods, and Apple controlled 100% of the iPod revenue. The iTunes Music Store may now be the biggest music retailer in the U.S., but that's largely the result of its diverting value from the music it sells. It was a brilliant move by Apple--completely reversing the long-standing value relationship between consumer electronics devices and the content played on them--but it left the record companies sputtering in frustration.

With the iPod ship now sailed, however, the record companies are understandably anxious to make sure they're not left out of the value equation for new music services to the same degree. As ever-more devices and online services come with blanket music streaming licenses, most of the value created by that unlimited access to music will be concentrated in the device or service. Who will get to share in that value is primarily a function of bargaining power. And in the case of start-ups in need of licenses, that power is largely with the content owners. With little current value to offer in exchange for a license, the logical strategy for the labels is to ask for a piece of the future value their music will help create.

It may be true, as Potter suggests, that by demanding too much, too soon, the labels are stymieing the development of new services and preventing the creation of the very value they seek to claim. But that's really just an argument over price. By itself, it's not unreasonable for the record companies to seek a share of the value their intellectual property will help create, even if it makes them look "greedy."
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