禇移风·New Execution Engine

Sean Ryan, formerly an executive at Real/Rhapsody, recently started a
blog. One of his first posts is a really good one about about how
digital music is a really tough business, and how he will be staying
out of this sector.

"I think digital music will eventually be extremely profitable for the
content providers, including publishers, but I struggle to find a
business model for the middle man in this business, at least for any
model which requires broad label rights. And when you consider the joys
of the mobile music sector, where you have both a concentrated supply
chain AND a concentrated customer base (4 -6 carriers), you begin to
see why I find that sector to just be a disaster in spite of the hype."

So we will most certainly not be in the digital music business here at
Donnerwood, primarily due to our collective experience in it over the
last 5-10 years, but I have no doubts that companies will continue to
pour resources into it.
As he says, it’s more difficult to get reasonable rights from the
labels than negotiating oil from OPEC (due to the substitutability of
the latter’s product), making for low margins. This combined with the
competitive marketplace with well-funded companies makes for a crummy
businesss.

Well put, Sean.

Unless you already touch a lot of consumers and think you can acquire
them cheaply, running your own online music store or subscription
service will probably be a losing proposition. But what about bricks
& mortar retailers who have had to negotiate rights with labels for
years and were still able to survive? They were able to do so because
of the real estate they controlled, which generated traffic into their
stores via their ‘environmental oligopoly’. Big retailers also have
lots of other products to draw people in. Distribution will be key,
which is why I think mobile carriers will profit from digital music (as
long as they don’t get greedy and continue to charge $3 for a song).
Radio stations are also well placed given their broad distribution via
their real estate on the dial. Branding will be important but won’t be
the silver bullet withouth organic distribution. Look at Napster, which
continues to hemmorhage cash despite having one of the best known music
brands around.

With all of that said, there are a few areas of opportunity (though I’m sure I’ve missed out on many):

-Niche aggregator/retail. While Amazon, etc. have deep catalog, their
scope is broad. That leaves room for niche players focusing on a
certain niche like CDBaby and others (thanks to Chris Anderson’s timely
post on this topic).
-Filters. As the quantity of easily available music grows, the role of
filters grows. There are a good number of players in this area already
but no one dominates, with Amazon’s closed recommendation system
probably being the largest, followed by Apple’s iMix. Still lots of
room for innovation as neither of these are a robust solution to the
problem. Musicmobs is trying to be the del.icio.us of playlists, which
is an interesting approach.

-Search. Again the offerings out now aren’t very robust. Blinkx &
GoFish are two startsup in this category though there are probably
others flying below the radar.

-Services. I’m a big believer in Web-based services. Besides music
rental, podcasting-related services immediately come to mind, but there
are others (one of which I can’t yet write about).

Of the above, it’ll be hard to build sustainable businesses from #2
& 3, although an acquisition-based exit strategy is perfectly
reasonable. So yes, digital music is a tough business for aggregators
and branded stores, but there will continue to be pockets of
opportunity for innovators that can offer the consumer and her friends
a better and easier way to enjoy music.