CD sales dropped 20 percent in 2008, as reported by The Wall Street Journal. But this isn't the whole story.
As Ars Technica points out, the music industry as a whole grew in 2008, with online sales accelerating. But this, too, doesn't tell the whole story.
The real story behind this creative destruction is called out by rising revenues for organizations like ASCAP, and underlined in the Media Futurist blog, where Gerd Leonhard points out that the real shift in the music industry is away from copy-based license business and toward flat-rate, attention-based business models. What is an attention-based model?
It's a model in which the creator's brand offers more protection than digital rights management because you can't counterfeit a live performance, for example. But it's more than that. It's also about customers liking and trusting one's brand enough to subscribe to a steady stream from the creator, not just partaking in dribs and drabs (i.e., licensing copies to the music).
Attention-based revenues (i.e. not just advertising-as-we-knew-it but also revenue sharing of flat-rate offerings, next-generation advertising, up-stream selling and marketing, sponsorships and branding, linking and referring, etc.) will very likely surpass copy and unit sales revenues.
A future where many content creators of all kinds, in all locations, and within all levels of accomplishment will make more money based on what their brand stands for, based on their fans, aka users, having real, meaningful experiences with or through them, and based on who pays attention to them, when and where....
In our immediate future as content creators and companies that serve them, it's all about gathering and converting attention--at least until the world is so well-served with feels-like-free content in return for attention that physical copies become desirable again (and they will).
What does this have to do with software? Much, if you're an open-source or SaaS business, but I think it also applies to Microsoft and Oracle. Whether open-source or proprietary software, however, I think it's particularly germane to the big providers in these categories: Red Hat, Sun Microsystems, Salesforce.com, Oracle, and Microsoft.
Why do enterprises pay Red Hat for a Red Hat Enterprise Linux subscription today? In part, it's to get a license to use RHEL on a particular server for a particular application at a particular time.
But really, it's to tap into an ongoing value stream, as Red Hat CEO Jim Whitehurst intimated to me several months ago. It's a subscription to the Red Hat experience, in other words, not one copy once and for all.
Today, that Red Hat experience is somewhat limited: it's an operating system, and it's an application server. I suspect, however, that Red Hat's future lies in becoming an ASCAP of open-source software, rather than The Police of operating systems. Customers will look to Red Hat to provide a steady stream of open-source value, not a few big "songs."
The same thing is happening elsewhere. Oracle has set itself up as a broad brand that can provide value on a wide array of fronts, following Microsoft's lead. Salesforce? It clearly has set its sights on becoming more than just a CRM player with a novel delivery model. It aims to be the ASCAP of SaaS-based software delivery. And Google? Well, looking at its top 10 applications, it's clear that it, too, is building a broad Google experience, not simply one-off applications.
This is the near-term future of enterprise software. It's not about protecting individual copies of software so much as delivering a strong brand that can command broad-based subscriptions to one's overall value. For open-source vendors like Red Hat and Sun, it may mean that they need to start aggregating a wider array of open-source products into their subscriptions sooner rather than later.
Amazon.com has produced yet another record holiday season. But it's Paul Kedrosky who discerns the significance:
The right way to think about these figures is in Schumpeterian terms: With retail sales down across the board, whose businesses are being destroyed here, and what is the future of physical retail? Amazon is merely goosing this process along, of course, and may not even end up being a survivor.
Such is the nature of business: some people lose while others win. It's not exactly a zero-sum game, but it can sure feel that way at times.
While the Web lobotomizes traditional retail, it's doing the same to software: open source, SaaS, and Web 2.0. I've been complaining lately about Web 2.0's effects on the media industry, but my concerns are probably overblown...in the long run.
The common denominator in all this creative destruction is the Web. It's not source code, data, or really anything else. When you analyze open source, Web 2.0, Amazon, etc., the real game-changer is the ease of access and distribution via the Web. Everything else is largely frosting.
What's the one big thing that Microsoft struggles to replicate? Not data lock-in. It has had that in spades with Microsoft Office file formats. Ditto with the positive (for Microsoft) network effects deriving from everyone using its tools/applications. Heck, Microsoft even arguably has some of the Web 2.0 benefits of self-improving applications as more and more people use its software, reporting crashes, bugs, etc.
But what Microsoft and the 1.0 world don't have is free distribution, free access. That is the thing that is roiling old-world businesses and replacing them with new-world businesses, ones that, for the most part, still haven't figured out how to make much money--with exceptions such as Google, Amazon, eBay, etc.
But if you take a close look at these companies, you notice that while they absolutely do display some of the hallmarks of the 2.0 world, their money comes in distinctively 1.0 ways: selling goods for lower cost, higher volumes, and at greater efficiencies--efficiencies enabled by effective use of the Web for cheap access and distribution.
Going forward, I think we're going to see more of the same: open-source companies using the Web to efficiently seed the market and distribute software, but with largely traditional 1.0 value on the other end of the phone. SaaS providers doing the same, but providing even greater 1.0 lock-in via centralized distribution over the Web. Web services companies using the Internet to aggregate and orchestrate content but ultimately paying or otherwise centralizing the best authors (Wikipedia, anyone?).
The Web has changed the economics of business, just not as completely as we had assumed. It has a dramatic effect on the price of distribution and customer discovery. As for actually delivering the goods, well, that's still mostly a 1.0 affair, which is a testament to the model's power. It can borrow from the Web while still monetizing off the Web.
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