One of the most insightful points in Jobs' post - though so simple and obvious that it has been overlooked for a while - is that while the major labels continue to push for digital rights management (DRM) for digital music, 90% of all music sold is DRM-free (i.e., physical CDs). Now I am no music industry expert (there are smarter, more insightful people than me who write on this topic, like Hypebot and Coolfer), but for the life of me I can't figure out while the Labels won't embrace DRM-free online music given that they sell CDs this way. The prevailing theory of why this is happening, of course, is the threat of piracy.
With no real research, I suspect that P2P illegal file sharing most likely occurs from people buying CDs, ripping them, then sharing them, and generally not someone buying an unprotected mp3 file and uploading it. "Who sells unprotected mp3 files of music that is actually popular?" you may ask, especially if you ignore the success of and/or don't have a taste for the catalog of eMusic. But think of the recently shut down allofmp3.com, a Russian download site selling albums for like $3.99 in mp3 format (with questionable legality). People could have easily bought mp3s from this site and shared them on a P2P network or Torrent. But...that just doesn't seem to jive with human nature. Of course, like most of my thoughts, it's based totally on my intuition and no fact....but I just can't picture it.
Instead, I think the economic model of the album is really driving this resistance to embrace unprotected digital music. Labels make a good amount of money on the album product. No one sells singles in stores anymore. When was the last time you saw a CD single for sale? You only really see singles on vinyl, as part of extended re-mixes for DJs. Otherwise, singles are generally only available in the digital format. (Note: the last single I bought - or, more accurately, my brother brought - was U2's cassette single of "Desire", which had a great song titled "Hallejuah, (Here She Comes)", which I think is now on Disc 2 of their Best of 1980 - 1990).
No, the labels exclusively push the album product. But, this wasn't always so. A great 2003 New Yorker article provides an interesting look at the history of recorded music (and touches on so many other aspects of the modern music industry). Music was orginally sold as singles, and artists sold only singles for the longest time - really until The Beatles popularized the album concept. Of course, the record labels loved it - the cost to manufacture and distribute an album was only nominally more expensive than that of a single - but they could charge a much higher price due to its perceived value (10 songs on a 33.3 rpm album record versus the two you would get on a 45 rpm single). Higher price, same cost = more profit.
But the interesting thing is, by most accounts, digital music provides greater profit for labels than physical sales. From this report (sure it is Canadian and from 2004, but it gives directionally-correct data), we see that Labels make an estimated profit of $1.20 per physical album. For a digital track, however, they make around $0.47/song....the breakdown in this report of digital tracks doesn't account for marketing + promotion - but let's say it is still roughtly 13% of the price, as it is for CDs (as indicated in the report)...so $0.47 - $0.13 = $0.34 per digital song in profit for the label. Estimate 10 songs/album, that is $3.40 per digital album. So, let's summarize: the labels sell a DRM-free album at a margin of $1.20, but they aren't willing to sell that same DRM-free album, in another medium, at a margin of $3.40???? Now, I generally can't think myself out of paper bag - but WTF?? This makes no sense. The labels hide behind piracy - piracy is why selling unprotected mp3s will kill their business. But, as Jobs points out, piracy is equally as likely with a CD as a digitally unprotected track - there is something more going here!!!!
The problem is this: in the digital world, consumers aren't forced to buy the bundled product, i.e., album (sure, some artists on digital media retailers do enforce this, but for the most part, this doesn't happen). Consumers can buy the songs a la carte as they choose - an option they don't have in the physical world. So, let's compare how a the label would make out if they sold CDs to 100,000 customers (i.e., 100,000 CDs) versus some combination of digital tracks to 100,000 customers. Making assumptions for the average album on the proportion of people who, if given the choice, would still buy the entire album or only some portion thereof, we get a quick and dirty analysis that looks like this:
Sure, it won't fall exactly like this, but you get the point: unbundling the album threatens the favorable economics that the Labels get by bundling the album in a CD. Sure piracy is a factor at play - but given that a CD can be pirated with as equal ease as an unprotected track - you have to wonder if this doesn't account for some of the resistance. So what are the implications for the labels: either sell a lot of a single song or sell more albums. If you're a Long Tail disciple, the first strategy will be increasingly more and more difficult in the future. How do you sell more albums? Well, most recently, The Shins sold 119,000 albums, 30% of which were digital. Maybe good artists making quality albums may be the prevailing business model of the future?
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