Ah, what could have been. In the heyday of Napster, I would download singles I would never have paid for – goofy songs like Cher’s “I Believe”. And the fun could have continued for $10 a month. The record company’s held a secret meeting with the Napster CEO in 2000:

Seven years ago, the music industry’s top executives gathered for secret talks with Napster CEO Hank Barry. At a July 15th, 2000, meeting, the execs — including the CEO of Universal’s parent company, Edgar Bronfman Jr.; Sony Corp. head Nobuyuki Idei; and Bertelsmann chief Thomas Middelhof — sat in a hotel in Sun Valley, Idaho, with Barry and told him that they wanted to strike licensing deals with Napster. “Mr. Idei started the meeting,” recalls Barry, now a director in the law firm Howard Rice. “He was talking about how Napster was something the customers wanted.”

The idea was to let Napster’s 38 million users keep downloading for a monthly subscription fee — roughly $10 — with revenues split between the service and the labels.

But ultimately, despite a public offer of $1 billion from Napster, the companies never reached a settlement.

Now album sales are down from 785 million albums in 2000 to 588 million in 2006; record stores are closing; laid-off workers are polishing their LinkedIn profiles; and ringtones and iTunes are not making up the shortfall (let alone restoring growth).

The article points many fingers, but it’s a familiar business-school case study: incumbent players are pressured by distribution relationships to prevent the growth of cheaper channels.

As for record company execs: they may be criticized as ostriches, but they have weak strategic power. When your main suppliers – the talent – can demand “no-look” clauses in their contracts, and your main distributor is Wal-Mart, you’re vulnerable. The Internet has created a new distribution channel, and the incumbent suppliers and distributors has every interest in pressuring the record companies to fight the tidal wave.

The next middlemen to suffer? Certainly the TV and cable networks. Expensive talent, and powerful distributors (Wal-Mart for DVDs, Comcast for cable).

It’s only a matter of time when some talent decides to take VC money to produce a show the quality of Lost, 24, or Grey’s Anatomy and distribute it all directly to consumers. The cost of creating a TV series is surprisingly close to the average series B round. And the ROI timeline is similar as well.
How soon before private equity starts raising money to fund David Chase or Darren Star to create an all-Internet TV series?

Posted 10 years ago by John Piscitello

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