The Music Industry's Most Amusing Myth: It Can't Compete With Free

by John Davidson
26 November 2007

Sometimes I am stunned at the stupidity of smart people. The music business has never been worse: compact disc sales are plummeting in all genres, the industry is in decline, and the root of it all is technological revolution. The controlling entities of the business—the major labels and their attorneys at the RIAA—have played chicken since the turn of the century and boil down their failure to the ridiculous meme that, “It’s impossible to compete with free.”

Tell that to the bottled water industry, who competes with tap water and ubiquitous public drinking fountains. Tell that to Starbucks, who’s created an empire on expensive coffee and has to not only compete with home brew, but the cheap stuff that McDonald’s has sold for decades. Tell that to the billion dollar cleaning services industry, which provides clean homes and businesses that could otherwise be done for free by inhabitants. Tell that to lawncare service companies, who do what our kids and fathers used to do on weekends. Tell that to private toll road developers, who bank on convenience trumping freeways. There are examples of competing with free (and near-free) all over the place.

But wait, you say: the music business is different than all those other guys because they are essentially competing against their own product . And yes, there are some logistical differences and legal implications that indeed make the music business unique, but the what doesn’t change is the importance of marketing in the value equation. Every industry has unique transaction scenarios that affect it, and using your uniqueness as an inability to compete isn’t believable. If the industry reduces their failure down to pricing competition, then they will always lose to the lowest price.

“Free” is simply a value holder in a transaction. It’s just a number, and its context is everything. In the music business, “free” is really no different from ”$.99” at iTunes—remember, Apple’s not making any money from selling songs at iTunes; iTunes merely functions as a marketing device for the iPod (which in turn was developed to sell more computers!) Apple sees iTunes as a cost of growing its computer business, and we see it as a buck a song. In fact, Apple determined the price point through marketing research; the price (correctly) isn’t based on the cost of running iTunes. It’s based on what Apple thinks consumers are willing to pay.

Massive leadership change is long overdue in the music industry and guys like Doug Morris have lived in denial for too long. Labels have been selling millions and millions of unprotected compact discs for the past decade, even though they’ve known that people could and were cloning those very CDs on their computer. They’ve been advised to lower the retail prices of compact discs and their attempt to do that was so weak that it came off like a publicity ploy. The majors were creamed by their weak Internet presence, they let decades of label brand development wash away with conglomeration, and they’ve shouted down naysayers in the press ever since Napster. They say they can’t compete with free but there’s not a lot of proof they could compete with $.99 songs at iTunes, either.

Filed under music industry business