Wednesday, October 22, 2008

Connect the dots... but do not assume

So I finally had some time to consider (and write down my thoughts on) the implications of Apple claiming they "most likely would not continue to operate (the iTunes store) if it were no longer possible to do so profitably." (see Forbes story towards the bottom).

Let me say that I highly respect and admire the contributors to MacBreak Weekly, but here they (as well as TWIT that week) made a big jump. Not operating iTunes store at a loss does NOT mean they must shut down the store. There are alternative ways to run the store for a small profit.

Alex Lindsay has discussed on MacBreak Weekly the relationship between creators (musicians, filmmakers, etc) and Apple products. Take the example of iMovie's menu option, "Export to YouTube". Now make a paid version in Garage Band (or Soundtrack Pro) that says "Include in iTunes store". Then after the music revolution is running on all cylinders, Final Cut Pro gets the same type of option to sell movies or shows in the iTunes Store (do we call it Television when it looses all connection to classic television?).

OK, maybe you're thinking "That's a nice theory, but it's just a thought experiment". After all, Apple could have done this at any time, even before signing with the labels originally. Yes and no, Apple actually could not have done this type of deal before they settled their long running legal negotiations with Apple Corps, but they could have initiated a direct music service any time after Februrary 2007. Besides, Apple doesn't want to handle all the billing and accounting issues surrounding millions of content creators with a small number of sales, right?

If only there was a recent example of Apple cutting out layers of publishers and going straight to the creators... Maybe a store that sold little widgets or games that ran on Apple hardware. Wait, I think I've got it! The App Store. Rather than recruit a few big companies to develop applications for the App Store, Apple created a pipeline. They released the tools, published the enrollment process, and handled all of the fees, and standardized the rates for their share and the creators share.

And what would musicians get out of the deal. How many musicians would like to keep 70% of the proceeds of their creation and still have a shot at Apple's front page. All of them (except maybe the 3 or 4 who already have that kind of deal after decades in the industry, think NIN).

Why does Apple want to do this? Because even if they do not, somebody else will. They have the opportunity to have a big splashy announcement that takes everyone by surprise, or Steve Jobs can try to paint an "us too" announcement as revolutionary (which he's very good at doing, but why not just be first). No other company could do it with the kind of earth-shattering effect of Apple, but that does not mean it could not succeed. Amazon has the best chance to create the big marketplace version of it, but it will lack the style of an Apple offering.

Why did Apple start the ball rolling with the App Store? The software industry is already much more diversified than the Music and Movie/TV industry. Independent software developers have been swimming with the big boys before Apple brought their model to the App Store. It's a perfect way to work the kinks out of the pipeline. Once they add music submissions, they'll already know how to handle the billing issues, the application process, etc.

Now there is just one problem: old media. As I said at the top, I have no idea what kind of contract the music companies have made with Apple. What I do believe is that they all think Apple needs them more than they need Apple. The hole in the boat that may have alerted them to their folly was NBC walking away from Apple, only to walk right back the next year. But hopefully (for consumers) the big media companies will keep pushing Apple, keeping giving DRM-free music to Amazon instead of iTunes, keep pushing to raise the prices on the iTunes store. When one of the Record Companies declines to renew its contract with Apple, all the analysts will say this is a huge blow to Apple, not realizing that this is a huge win for Apple. Then when all the cards are turned over and Apple ends up transforming the industry, analysts will wonder if this was strategy or making lemonade from lemons.

And I will wonder to. If something remotely like this happens I will be able to pretend that I am prescient rather than lucky. But I will know (and admit) that I only connected the dots that others pointed out. And I will know that the best part of the whole thing is getting to be a consumer in that new age of consumption.

Which brings me to my final point. Did the financial crisis ruin the opportunity? Actually it might have made this scenario more plausible. After all, Apple does not make its money off of iTunes, it just does not want to lose a lot of money to it either. Ultimately, Apple makes money on iPods. With disposable income declining for the time being, the best way to stave off losses is to offer something fresh and interesting. Also, if it uses the next few years to position itself properly, it will be ready to blast through new heights when the next cycle starts to lift. Then again, it might be easier to just release some new shiny MacBooks!

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