There is a lot of interesting speculation about ITunes Music Sales. Are they going up , down, flat, flattening ?
There is a lot of interesting speculation about Zune sales. Will sales accelerate, slowdown, drop off a cliff ?
What there hasn't been much of, is speculation of what might happen if Google entered this market.
It used to be that no matter what technology business you entered, you always had to model for what would happen if Microsoft entered your business and tried to kick your ass. These days Google has taken that spot with Microsoft still a force to be reckoned with and Apple the wild card in any personal electronics or digital distribution of content. So let me offer my personal speculation of what might happen when Titans clash in the online music sales and device business and why they will clash.
First the why. The brilliance of apple in personal electronics is that they realize that music sells Ipods. Sell 65 million Ipods at an average of a couple hundred dollars each, plus accessories and thats real money. A whole lot more exciting than the $ 300mm in gross margins (30pct of 1billion songs) from music content. Smart. But not a strategy that only Apple can implement.
Lets start with Itunes Music Sales. Slowing or accelerating, we can safely say that they can or will sell 1 Billion songs a year. We can also safely say that they pay about 70 cents per song back to the label/licensor of the song. So doing the math, they pay out about 700mm dollars a year to the labels. Now if we aggregate 2005 market share for the top music labels of about 82 pct and multiply them by the payout from ITMS sales, that would mean that Apple paid about $ 575mm to the top labels for the year.
Now lets introduce Googlenomics.
There has been speculation that Google is offering 100mm dollar or more licensing opportunities to TV Networks. Thats 100mm in cash for SEGMENTS of shows. Not full shows. Not full movies. Clips. There has also been speculation that GOogle offered stock in exchange for licenses at the time of the Youtube transaction. If true, and I believe they are, these actions in the user generated video space defines that I think will come to be their approach to capturing content markets. Pay a lot of money in a land grab for the best properties you can find and aggregate them in a manner that can pre-empt or displace the existing competition, and then give the content you just paid a boatload to license away for free, hoping to make your money back along with a return by selling advertising around it.
For the historians of the PC industry, its not a far cry to the maneuver that put Microsoft Office in the drives seat many years ago. When Office apps were also rans, the traditional spreadsheet, word processor, database and graphics program cost about $495 EACH. MicroSoft decided to offer their Microsoft Office Suite as an upgrade to any competitive product for only $99. The promotion brought major market share and a foundation for software upgrade revenue that would be in place for a decade. Microsoft tried to own your desktop, Google tries to own the advertising on your browser. Not apples to apples, but pretty damn close. Get big, subsidize and monetize.
So how could/would Google enter the Itunes Market ? I dont know if they would buy or build their user interface for a music store, but I would be willing to bet they would use their stock and cash in the bank to go to the same companies they are licensing music videos from Universal, Warner Music and fellow market share leaders and basically pay them about $575mm per year in licensing revenues for exclusive access to SELL OR GIVEAWAY their music online (Online only, say the 1st Billion songs ?)
Its the answer to the following question: Would it be worth it to Google to pay $575mm and up per year to completely turn Apple upside down ? To completely pre empt their ability to sell IPods ? To potentially introduce a new hardware device, or partner with someone who has one ? To sell advertising around the music rather than the music itself ? Is their a traditional Google arb here of 70c per song vs 70c of advertising around the song ? Could it sell that much advertising online to justify giving the music away ?
Which also requires that we introduce MicroSoft into the equation. Could they position the Zune as the defacto winner by spending $575mm per year with the music labels and giving the 1st billion songs away to Zune owners ? Of course they could create the possibility of selling ads online the same way as Google
Or would Yahoo enter the fray and partner with a 3rd party or Microsoft and pony up the stock and/or cash ?
Is turning the IPod/PDA industry upside down worth $575mm a year ?
I would think so, but time will tell.
.
Googlenomics , Itunes and Zune
Reader Comments
(Page 1)2. The process of deciding wether or not to invest in an idea like that makes me think of the many hours of math and research done to help make the best decision possible. So much linear algebra involved and calculus. I'm sure if such an investment was made, within the first quarter you could figure out exactly where you're heading and wether or not to continue with the project. What a thought! we'll see
3. very interesting post. i take your analysis not to music, but to cell phones/blackberry/pocket pc's. is a clean (free) interface that provides email (gmail?), and other apps (docs, spreadsheets, maps) far from becoming the "choice" OS for a new gen of devices? will they partner w/a manufacturer to create their "apple ipod" version of simplicity done right but still let others use the platform?
of course, eric schmidt on the board of apple adds another degree to this.
Posted at 10:21AM on Dec 13th 2006 by surya
4. I read a week or so ago that Google is getting into the radio ad business. If they do decide to get into the online music business, does this mean they throw a 5-10 second ad on the beginning of a song and let you download it for free? All the songs you want just a catchy jingle at the beginning of each one or the end for that matter.
5. One thing in all these talks of subsidized liscencsing for music, or advertising fee based music. Is how do we continue to create a market for deverse and specialized music. In the mid 90's music flourished with many genres and artists getting attention but the pop idol came and music became a banal push of just the top money makers.
With these sortof blanket liscensing deals would the major labels only care about the top talent? I am already annoyed at paying for 100 unwatched channels of Cable TV, I don't want my iPod to pay for 20 pop artists that I won't even be listenting too.
I think the real shift in the digital music distribution economy is going to be artists continuing to shy away from big labels altogether as it becomes more economical to distribute and market yourself online. The major labels will keep doing these stop gap techniques to monetise new technologies, but the real power in the new technologies is making the old distribution model obsolete. Apple probably isn't too concerned with the ITS, but artists who can skip paying a high percentage of their music's profit to the labels will start to use these stores in ways the Labels simply can't.
Posted at 10:47AM on Dec 13th 2006 by Brendan Piper
6. What format would the Google Tunes be in? DRM-free MP3s that could freely be shared and could cannibalize CD sales? Or another DRM scheme that won't work on most portable music players? You're thinking ahead to a day if and when the music companies get off the DRM crack. If that happens, and we're starting to see baby steps, then its a whole new ballgame.
Posted at 10:54AM on Dec 13th 2006 by Gerard
7. I like what you're saying, but you make these deals mutually exclusive. Even if Google out-pays apple, you have two big concerns: (1) anti-trust (with the exclusive license agreement), which is also a problem with MSFT--just wait the anti-trust suits will go after Apple and Google too someday; and (2) apple's agreements with the labels - how can google or anyone else get an exclusive license when Apple already has the license--you need to know the terms of the bargain with apple and I'm sure they're well-protected from competition.
This is all extraneous to the last factor: people. What will consumers think?
8. Microsoft already competes in one market where they take heavy losses on equipment sales to make a profit on accessories, video games. With estimates being around -$200 for each XBox sold Microsoft has already learned the rules of leveraging one aspect of a device against the sale of supporting components in order to make a profit. I think Microsoft could have eliminated Apple from the market if they launched the Zune with unlimited free downloads from their online store using the same model (give away music, make the profits up on the player and accessories). However, with the utter failure of their launch for the Zune (crashing software, no support for podcasts, unable to use the Zune while docked, etc.) it will take drastic steps for Microsoft to make a dent in the iPod at this time.
Posted at 11:21AM on Dec 13th 2006 by Sean Foushee
9. Mark Cuban's music licensing numbers are wrong: its 1 thing to receive $575m as a percentage of actual sales; it's a whole other ball game for the music companies to agree to that low a number for CD quality music that will be given away for free by Google so they can sell ads. If your entire catalog is going to be available for free on the internet, why would you sell something worth billions for millions? It's true that Google can come up with some game changing manouvers in the music space, but I don't think Apple is selling so many iPods because they have a good music store- they are selling so many iPods because it is the best digital music player. As long as their music player remains the best & easiest to use, even if all the music was free, I bet Apple would continue to have the #1 selling DMP.
Posted at 11:22AM on Dec 13th 2006 by Abbi Vakil
10. The only flaw in your analysis Mark, is that a price point of free (and legal), consumers will download a whole lot more than $1B worth of music. The cost of subsidizing music for Google (if it was free) would be in the multi-billions per year and not the $575MM your assuming. Google could potentially make that up in hardware sales... but the hardware would have to have more than music as a focus.
11. Well given that Schmidt sits on Apple's board and is very friendly with Steve Jobs, I'd guess Google will collaborate with Apple rather than compete.
Google still doesn't have an entry into the living room, Apple does. I can't believe Apple expects people to suddenly start paying for movies and TV shows they can get for free, and Apple won't start their own ad network (if they wanted to, they had the perfect opportunity with iTunes).
But how do you target audio ads around music? do advertisers pick certain tracks and buy some impressions for it?
So far Google's baby steps into display ads have been weak and their ideas for the future are a little 'out-there' (remember when it was ads based on what you're watching based on mic-input?), and check out Google's new radio ad system; terrible for the new generation of accoutability in advertising.
I may be wrong but my vision is the content being kept on the network's end, not the user's. Make an iPod without the storage, call it a cell phone and give it away with a monthly contract.
Posted at 12:12PM on Dec 13th 2006 by Adam Cains
12. I disagree with you 50% of the time, but I'm completely on board with this analysis. Microsoft has the money to take on Apple here, affording to lose money to win in the long run (think XBox).
I am actually excited to see what they do here. I'm about to get a Zune, just to play around with it. My iPod is getting boring lately.
Posted at 1:06PM on Dec 13th 2006 by Robyn Tippins
13. Mark Cuban, you are officially off your rocker. You really think that the music industry is going to put all its eggs in one basket by shifting its dependency on Apple to a dependency on Google? You might as well tell a drug addict that you'll cure his addiction to crack by getting him hooked on heroin instead. You often have interesting perspectives on the internet world. This wasn't one of them. Back to the Bat Cave for you.
Posted at 1:12PM on Dec 13th 2006 by Tommo_UK
15. I think that the internet is taking control away from the middlemen and giving more control back to consumers and the media creators.
Projects like http://www.aswarmofangels.com/ show that there is incentive for even a million dollar movie deal to be funded for release under Creative Commons. The world just needs a centralized place for these kinds of deals to occur. There is one comming out at the beginning of next year.
Posted at 2:30PM on Dec 13th 2006 by Brandt Cannici
17. just think about it...a google ipod...or something of the likes. that would be so cool! google is getting bigger and bigger. its amazing how its grown. who knows waht they'll do next...but i think that google music is a great way to keep getting bigger
18. That is just the nature of competition, which would make the already great Apple products even better for cheaper. And I really don't mind that Microsoft foots the bill on that one...
Posted at 6:03PM on Dec 13th 2006 by Gavin the photographer
19. Microsoft & Office vs. Google & ads
The ONLY real difference (and it's a great analogy) is that Office is something people paid to own - they wanted it. They beckoned it. Online ads are something the end user doesn't want - we run popup blockers, spyware protection, and adaware to keep that stuff away from us. Now, online ADVERTISERS may want it, so they pay Google, but as ads get less & less effective and things like MySpace and networking get more and more effective, ads won't be what Office was. I'm still using MS Word but I don't think I have EVER clicked on a google adword on purpose.
M
Posted at 6:07PM on Dec 13th 2006 by Matt Antonino
20. The problem here is that music is not something that can be consistently monetized. Any new music medium (whether cassette tape, CD, iTunes, Future Google Music Medium, etc.) will start off with a huge back catalog of music to sell. Albums going all the way back to the beginning of music recording. So people who had a whole collection of Beatles LP's went back and bought the entire Beatles catalog on CD when they came out. This kind of thing inflated CD sales for the initial period of CD adoption. After that, sales slowly started to trickle down. The same thing should be expected of any new music medium, including iTunes. There's no way that the current pace of iTunes music sales can be sustained indefinitely. There's simply not that much new music being recorded. Eventually most people going to have pretty much all the music they want, and buy maybe 5 albums' worth of new music per year.
Two side notes:
1) Physical media (LP, cassette tape, CD) can be re-sold. Digital media (iTunes et al) cannot. The secondary market for iTunes Music is 0. In the CD age, we had a lot of "music nuts" being able to sustain large levels of music purchases by continually selling back their old CD's. This is impossible with iTunes or other purely-digital music, so (unless music becomes substantially cheaper) I don't think the digital "churn rate" will be nearly as high as it was for CD's.
2) In the past, there were very limited means to transfer music from one medium to the next. You could copy tape-to-tape but it lost quality. Burning CD's took time and a bit of money. Copying a digital music file takes little time and no money (aside from the hard drive space, which is renewable -- just delete the file). At the moment, a CD is close enough to being a "perfect master" that can be morphed with little effort and minimal loss of quality into any other medium, analog or digital.
Lastly, I doubt that music companies could make a profit based solely off of their current artists. Back catalog sales make or break the industry. The thing that everybody's realized, but that nobody talks about, is that the cat's out of the bag with respect to the back catalog. CD's were DRM-free, and you can find pretty much any recording on CD, rip it to a digital audio file, and then share it with the entire world. Therefore, the "cash cow" for music labels is on its way to the slaughterhouse. The iTunes explosion was probably the last chance the labels had to monetize it effectively. Moving forward, NOBODY will buy the same music over again.
The same thing is going to happen with video too, but it won't be as drastic, as there are still improvements to be made to video quality etc. Also, I don't think that the film industry is as reliant on the back catalog as the music industry, although I have no numbers to back that up.
Anyway, the point of all of this is that monetizing music is going to be increasingly difficult, regardless of whether it's Google or Apple or Microsoft that's doing it. I really don't see where MS is going with the Zune. It's obvious to me and most others that the iPod is Apple's Trojan Horse to get into people's houses, heads and hearts. And it's working. The music biz is just a means to an end for Apple. That's why I'm scratching my head over the Zune.
As for Google? Actually, what you say does make sense, and it may be the only money-making avenue left for music. "Making all music free (except for advertising)" is heading in the right direction, trend-wise. Eventually music will be free outright -- really, it already is among those willing to break the law.
Add your comments
Please keep your comments relevant to this blog entry: inappropriate or purely promotional comments may be removed. Email addresses are never displayed, but they are required to confirm your comments. To create a live link, simply type the URL (including http://) or email address and we will make it a live link for you. You can put up to 3 URLs in your comments. Line breaks and paragraphs are automatically converted — no need to use <p> or <br> tags.
1. google microsoft or apple no matter what company they can only rule one.google with their advertising,microsoft with their os and office and so on..it will 99 percent never change.
my 2cents
Posted at 10:08AM on Dec 13th 2006 by Imran