禇移风·New Execution Engine

Due to my previous experience at Listen.com/RealNetworks, I seem to get
a lot of business plans and questions about digital music. When
starting Donnerwood, we spent a lot of time looking at the music
business, and we were simply not smart enough to discover a sustainable
way to drive value in that sector.

Why is that? At the end of the day, you have what I call a "serial
monopoly" of 4 suppliers (labels), meaning that it’s more difficult to
get reasonable music rights than it is negotiating with an oligopoly
like OPEC since Eminem and Norah Jones are not substitutable, while
crude oil from Mexico and Saudi Arabia is relatively substitutable.
This is not a knock on the labels - in fact I spend a lot of time
defending labels who generally act according to what they believe their
best interests are - it’s simply a matter of leverage - a start up
needs to have rights from all of the major labels (EMI, Sony/BMG,
Universal, Warner) and most of the smaller ones in order to compete in
the sector, and the lack of those rights generally cripples the
business - therefore, there is essentially no negotiating leverage,
which makes for very low margins.

To top it off, you need to pair those low margins/lack of leverage with
an intensely competitive marketplace, with RealNetworks, Napster,
Apple, Sony, Yahoo, Wal-Mart, MSN, and a host of others all marketing
like wild, discounting the product (MSN’s buy 1, get 5 free), and
trying to cut exclusive content deals. Only Apple has truly managed to
show profits in the business, primarily through sales of related
hardware, and finally, through an 80% market share of the download
market, but it’s must just be brutal for the others.

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.