“Five Years Ago, If You Wanted to Carry Around a Thousand Songs in Your Pocket You Carried a Radio. That Has Changed.”

Michael Hedges April 30, 2007

Media consumers are dancing, en masse, to the new digital beat, awaited, predicted for a generation. Or, so it seems. Media people, those disposed to listen to their customers, have heard the patter turn to rumble and now stampede. Before the gathering dust cloud stifles their offices and golf courses many hope for an early escape to a Caribbean island. Very sorry: there is no buggy, car, airplane or rocket fast enough.

The headline quote is from a radio programming executive working for a very VERY large broadcaster, identity shielded. He’s terrified of the iPod. Disruption is terrifying.

In five very short years the Apple iPod has become the disruptive product.  One hundred million iPods have users. Ten and a half million have been sold in this years’ first quarter. Everybody notices.

To attract measurable audience at the lowest cost, radio broadcasting became nothing more – or less – than a music downloading service. Listeners “downloaded” music – to their ears – paying only by listening also to a few ads. The capture was transient, not permanent, for all but the anoraks willing to record and edit. That these music seekers seemed to avoid any content other than music (i.e. speech) was music to the business plan. Fire the DJs! The ratings might not be great but the profit margins were stupendous.

Then the digital OOPS! happened. Radio fell out of favor as the music downloading service of choice when choice became elemental and digital technology made it possible. Napster, eventually, attracted more than only anoraks with too much time on their hands. The music business moved quickly to kill it, though they managed only to briefly delay writing their own new business plan.

Broadcasters haven’t decided exactly what to do. The dominant business model calls for cheap content, large (and cheap) distribution and advertising sold by the ton -  not unlike all media...or coal mining. To broadcasters the business model accrued a swift and significant digital benefit. Replacing analogue with digital systems over the last two decades brought lower operating costs (i.e. Fire the engineers and the DJs). The cost of increasing distribution into digital channels, like cable systems, the internet and mobile telephones, was marginal…until content rights holders slammed that door with higher tariffs.

Even selling advertising by the ton reaped the digital benefit – media planning software made aggregating audiences for the maximum (or minimum) price-point a click away. And Google’s recent foray into selling ads for newspapers, television and radio simply shows the direction of ad sales – lower.

All this points to Plan B – the business model everybody sees coming and nobody wants.  Creating compelling content is costly, almost a lost art and never the shareholders first choice. The evidence is the huge premiums paid for aggregators of user-generated (i.e. cheap) content like YouTube, MySpace and the myriad of social networking sites. Nothing disrupts more than a change in business model and no cost is spared in trying to sustain the unsustainable. 

One sure measure of disruptive power is the amount of energy spent trying to contain the disruption. American (terrestrial) broadcasters want to contain satellite radio, internet radio and, now, mobile radio. The National Association of Broadcasters (US) President David Rehr told his congregation that he’d “fight with all we have.” Apparently that means to the death.

Apple’s complimentary innovation, iTunes, is equally disruptive. So much so the music business with the aid of entire governments feels the need to shut it down. Content providers and rights holders consistently attempt to kill what they cannot control – witness Viacom’s $1 billion lawsuit cum business negotiation directed at Google.

Apple – like Microsoft before it – is Europe’s soft target for innovative revenge. Five countries – France most vociferously – and the European Commission are attempting to hammer Apple into negotiations via threat of massive fines to “open up” and let them, literally, play. Interoperability was the first threshold, music and other content purchased through iTunes downloads only to iPods. Apple CEO Steve Jobs recently suggested that the typical Pod owner downloads only 3% their iPod content from iTunes. The rest, he said, comes from unprotected CDs. (I am resisting the temptation to pursue THAT metaphor.)

Calls for interoperability – all download services and players to be mutually accessible – rang through parliaments. At least they did until the content rights holders yelled “Wait a minute.” They need a robust system of collecting money for all of that downloading (since the music business killed off their retailers) and digital rights management (DRM) systems are, they said, the solution. When a consumer points and clicks to download a music track, DRM points to their credit card for a download of cash. Apple’s Freeview took care of that but it also controlled the price…and the amount paid to the rights holders.

So Apple and music company EMI jumped the shark one more time, announcing a deal at the first of April for a DRM-free download service, for a slightly increased price, with the advanced audio codec ACC. How can the rights holders complain if Apple is negotiating? Surly you jest!

The EC Competition Commissioner Neelie Kroes is investigating the pricing, announced one day after the Apple/EMI deal. iTunes store downloads in the UK cost less than on the Continent. Each country has a dedicated iTunes site, so much better to process the rights fees, and each displays distinctive content. If Commissioner Kroes stays true to her single-market mandate Apple and the big music companies would benefit, and maybe consumers, too. It’s the powerful rights fee collecting societies, individually lobbying their own parliaments and collectively hammering Brussels and Strasburg, who stand to lose their obtuse and often outrageous revenue streams. Brussels has steadfastly avoided bring anti-trust actions against the collecting societies who control the rights payments from broadcasters, internet services and, even, pubs. In America the music rights collecting societies successfully interred the US Congress to raise rights fees on internet radio to a level that will succeed in killing that new medium.

Apple is charging a 30% premium for the DRM-free, advanced codec service. That’s $1.29 (€0.95) vs. $0.99 (€0.73) per tune.

DRM isn’t just for music downloads. Video content producers want their share as video content distributors, in an earlier day called TV broadcasters, scramble to find anything to fill the 500 channels (“…and nothing’s on TV…”). Viacom sues YouTube.

YouTube, with imitators galore, has the best of the old business model – cheap content, cheap distribution and ads by the ton. But there’s more. With the cost personal computers, broadband connections and clever software plummeting not only can media consumers construct their own television but, true to the age, they can be on TV. Like blogs that give people with nothing to say an opportunity to reveal their depth to the rest of the world, media has finally reached its Warhollian conclusion. Not only can you be famous for 15 minutes but ANYBODY can be famous.

If you wanted to find out what was going on around your country - or your world, if you were so inclined – 100 years ago you bought a newspaper. That’s changed, too. Now publishers give away their products in hopes that sufficient quantities will justify ad rates. You’d think newspapers were dead in the water until Le Monde, the Financial Times, SonntagsBlick or the stunningly talented McClatchy investigative team – and others - proves the “compelling content” argument.

Access relative to price has proved inelastic; media races to the bottom looking for a sustainable bottom line without disrupting the old models. Radio broadcasting will not be killed off by iPods, nor will YouTube kill the TV networks. In an atmosphere where all stars shine, no stars twinkle. At least not until somebody wipes that old smudge from the telescope lens.