Apple’s iTunes store has already passed Best Buy to become the #2 music retailer in the country and analysts predict that Apple will take the #1 spot from retail giant Wal Mart at some point this year.
Part of Apple’s rise is due to Best Buy, Wal Mart and the other retailers giving up on music. They see the inevitable decline so they shrink the titles and shelf space which forces a bigger decline. The retailers are right. They’ve got higher margin, faster selling product to sell. For the masses, the physical CD is over.
The other part is the excellent integration with iPod, the ease of use and the gift cards that allow the teen, tween, and younger set to purchase music without a credit card. It isn’t just retailers getting out, it’s Apple dominating.
But what happens when Apple is #1?
- The end of major label distribution
Physical distribution of millions of units to retailers can be a logistical nightmare. Returns must be tracked, accounts receivable monitored, etc. None of this matters anymore. Bands will go directly to a retailer — a la The Eagles and Wal Mart or just skip physical all together. Or do it themselves. What value does a major label deliver for the fee they charge? Exactly. See ya.
- The rise of digital competition
Amazon has already jumped in the game but its offering still has a ways to go. The social networking sites are trying to create music sales and someone will come up with something compelling eventually. With digital being the major game and the cost of entry fairly low, there will be many attempts to chip away at Apple’s dominance. Niche players will find a profitable way to survive.
- Catalog values will plummet
The major labels and a whole host of others have trumpeted the value of their catalogs; the masters and publishing they own or jointly own. Historically, these have been an appreciating asset bringing in semi-regular cash flow year in and year out. As catalog sales continue to wither away, the catalog value goes with it. Attempts to license publishing out to anyone with a $5 bill has seen a flood of commercials using artists previously thought to be above that sort of thing. The more willing sellers the better the bargain for the purchaser, the lower the catalog value goes, the more desperate the catalog owners get. Ugly vicious cycle.
- The majors will threaten to leave Apple. Someone will.
They’ve made the threat before but this time someone will actually make the move. It will be, in the end, akin to jumping on the grenade as that label’s digital revenue tumbles towards zero. But what else can a label do? After all, what artist wants to pay a label to pay Apple to digitally distribute? “You dipped the chip. You took a bite. And you dipped again.”
- DRM will disappear
The handcuffs of DRM will go away as everyone realizes that they need to sell iPod compatible product. Look for the majority of digital downloads to be DRM-free by the end of the year. The RIAA will still choke the air with its BS campaigns against its own customers but at least DRM will finally limp along to its timely death.
- Consumers will shrug and little will change with them
Most digital music still costs consumers absolutely nothing. The status quo will lead to increases in digital revenue but nowhere near enough to make up for the death of the physical. Digital still has a ways to go, especially on pricing, if the music industry wants to change the “steal versus buy” choice. Punishment via the RIAA doesn’t work. Reasonably priced product does. Change is slow and consumers don’t care. Watch torrent traffic continue to rise.
