In the late twentieth century a revolution began to take place in mainstream music incited by the innovation of the mp3 file format for listening to and recording audio tracks, which quickly became the standard for ripping audio CDs. The technology got rid of the excess audio information that could not be discerned by the human ear. It worked using a lossy compression algorithm, which was acceptable to all except for the most hardcore audiophiles.
Prior to this innovation came changes to the form of physical media, including records, cassettes, and later the compact disc, the most resilient of them all. I refer to the compact disc as being the most resilient media, because it was at this point, at the turn of the century, that the Record Companies entered into a vain and futile struggle to maintain the status quo. Their profits grew fat with compact discs. Arguably the easiest of the above mentioned media to manufacture, yielding for them the highest volume at the lowest cost as well as ensuring the tightest control over their distribution.
Michael Robertson, who was the pioneer of the eponymous mp3.com, was among the first to see the potential. What Robertson realized, that so escaped the Record Industry, was that there was a growing interest in mp3 downloads. He even had developed a streaming model similar to Apple’s iTunes match service. This seemingly simple innovation and approach to content distribution was well ahead of it’s time and quite literaly caught the Record Labels by surprise. They responded not by embracing this new found technology but by suing, and later acquiring, mp3.com.
A few years later services like Napster and Kazaa, managed to completely undermine the power of the record labels over music distribution. The scale of these services was such that an entire generation adopted them as their primary music consumption platform. It was Apple, which eventually came to rescue the music labels. Now Apple has the most influence and has become the largest music retailer.
The easiest solution, at the time, was to sue to protect their intellectual property, but in dealing with other companies currently following in mp3.com’s footsteps, such as Amazon or Google, things will no longer be as simple for the Record Labels. The irony being that the landscape of digital music has been so largely altered by Apple’s iTunes that the labels may find their best ally among these competitors to defend against Apple’s influence and control.
When the mp3 was introduced, the Record Companies failed to see the potential in the technology. It was not that the mp3 would make their business better, or help to increase their profit margins, although this would have been possible, if implemented correctly. The issue at hand was that if they failed to adapt to the changes in consumer preference, and spending, they would quickly become obsolete and would lose their status and influence in the music industry. This is eventually what happened. Instead of leading the revolution in the music space, these companies lagged far behind. The consumer, for the first time, was leading a revolt against the music industry as a whole. It’s not that consumers became unwilling to pay for music. It was simply that their preferred means of distribution, was ignored by the industry. The demand was for music to be downloaded over the internet and installed on personal media players. Because there was no legitimate way to do this, music was stolen. It was this that played into the Record Companies’ downfall. The mp3 revolution created a generation which is not accustomed to paying for music. The concept is alien and foreign to a fairly large and important demographic. I cannot tell you how many times I have heard, “Who pays for music?”.
The purpose of this discussion is to serve as a warning and as a lesson. This is not something that happens once and will be forgotten. It is this story in different forms which is at the heart of any revolution and can be beneficial for investors and companies to learn from. There was money to be made during this time. Any company which was witness to this dissonance in media distribution, and with the guts to change the status quo, would have made billions. The key was to discover a way to make money by taking the illegal system which was already in place as a model.