Googlenomics , Itunes and Zune

There is a lot of interesting speculation about ITunes Music Sales. Are they going up , down, flat, flattening ?

There is a lot of interesting speculation about Zune sales. Will sales accelerate, slowdown, drop off a cliff ?

What there hasn’t been much of, is speculation of what might happen if Google entered this market.

It used to be that no matter what technology business you entered, you always had to model for what would happen if Microsoft entered your business and tried to kick your ass. These days Google has taken that spot with Microsoft still a force to be reckoned with and Apple the wild card in any personal electronics or digital distribution of content. So let me offer my personal speculation of what might happen when Titans clash in the online music sales and device business and why they will clash.

First the why. The brilliance of apple in personal electronics is that they realize that music sells Ipods. Sell 65 million Ipods at an average of a couple hundred dollars each, plus accessories and thats real money. A whole lot more exciting than the $ 300mm in gross margins (30pct of 1billion songs) from music content. Smart. But not a strategy that only Apple can implement.

Lets start with Itunes Music Sales. Slowing or accelerating, we can safely say that they can or will sell 1 Billion songs a year. We can also safely say that they pay about 70 cents per song back to the label/licensor of the song. So doing the math, they pay out about 700mm dollars a year to the labels. Now if we aggregate 2005 market share for the top music labels of about 82 pct and multiply them by the payout from ITMS sales, that would mean that Apple paid about $ 575mm to the top labels for the year.

Now lets introduce Googlenomics.

There has been speculation that Google is offering 100mm dollar or more licensing opportunities to TV Networks. Thats 100mm in cash for SEGMENTS of shows. Not full shows. Not full movies. Clips. There has also been speculation that GOogle offered stock in exchange for licenses at the time of the Youtube transaction. If true, and I believe they are, these actions in the user generated video space defines that I think will come to be their approach to capturing content markets. Pay a lot of money in a land grab for the best properties you can find and aggregate them in a manner that can pre-empt or displace the existing competition, and then give the content you just paid a boatload to license away for free, hoping to make your money back along with a return by selling advertising around it.

For the historians of the PC industry, its not a far cry to the maneuver that put Microsoft Office in the drives seat many years ago. When Office apps were also rans, the traditional spreadsheet, word processor, database and graphics program cost about $495 EACH. MicroSoft decided to offer their Microsoft Office Suite as an upgrade to any competitive product for only $99. The promotion brought major market share and a foundation for software upgrade revenue that would be in place for a decade. Microsoft tried to own your desktop, Google tries to own the advertising on your browser. Not apples to apples, but pretty damn close. Get big, subsidize and monetize.

So how could/would Google enter the Itunes Market ? I dont know if they would buy or build their user interface for a music store, but I would be willing to bet they would use their stock and cash in the bank to go to the same companies they are licensing music videos from Universal, Warner Music and fellow market share leaders and basically pay them about $575mm per year in licensing revenues for exclusive access to SELL OR GIVEAWAY their music online (Online only, say the 1st Billion songs ?)

Its the answer to the following question: Would it be worth it to Google to pay $575mm and up per year to completely turn Apple upside down ? To completely pre empt their ability to sell IPods ? To potentially introduce a new hardware device, or partner with someone who has one ? To sell advertising around the music rather than the music itself ? Is their a traditional Google arb here of 70c per song vs 70c of advertising around the song ? Could it sell that much advertising online to justify giving the music away ?

Which also requires that we introduce MicroSoft into the equation. Could they position the Zune as the defacto winner by spending $575mm per year with the music labels and giving the 1st billion songs away to Zune owners ? Of course they could create the possibility of selling ads online the same way as Google

Or would Yahoo enter the fray and partner with a 3rd party or Microsoft and pony up the stock and/or cash ?

Is turning the IPod/PDA industry upside down worth $575mm a year ?

I would think so, but time will tell.

.

91 thoughts on “Googlenomics , Itunes and Zune

  1. If Google were to enter this market I think they should cut the major labels out of the idea and invest a fraction of the $575 million to introduce new music talent into the market.

    Comment by dell batteries -

  2. Chances are that if Google enter a market, they will target the undeveloped area, such as Unsigned Music in this case.

    Comment by Microsoft Zune -

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    Comment by talisha -

  4. You are aware that when they use their own store they\’ll more than likely charge more than itunes which has been actually keeping prices down to a level that most people generally find acceptable over just downloading them for free.

    Comment by instrumental -

  5. Zune looks nice and its new functions are great but iPod still is the best. Nothing compares to the iPod interface and design, although Zune really seems like a good product. Have you seen this iPod Touch ad made by an user? http://www.weshow.com/us/p/21278/home_made_ipod_touch_ad
    It shows in less than 30 seconds why Zune is good but an iPod is an iPod. Period.

    Comment by Joe -

  6. If Google were to enter this market I think they should cut the major labels out of the idea and invest a fraction of the $575 million to introduce new music talent into the market.

    Comment by Alexander -

  7. A very interesting article indeed. Personally I fell that Microsoft has missed the boat regarding Zune. I hardly see any new ads or marketing strategy for this product.
    As for Google entering online music sales I can see this happen, Google = Internet just as Microsoft = Desktops. Google has the power and money to make this happen. How they do it and market it is another aspect of the equation it will be interesting to watch.

    Comment by Christos -

  8. I think that with all of the conversion software programs popping up for Zune, iPod and so on it\’s going to be far cheaper for people just to convert music they already own rather than buy it all over again.

    Comment by Danette 4 Zune -

  9. It\’s seems these days that the Business Strategy of Big Tech is to get into every market possible, and cannibalise it.

    Isn\’t there are risk that at some point they stray from their core expertise and thus allow competitors to eat away at the edges of their core market?

    While Microsoft has been playing away, Linux based systems have been slowly chipping away at their markets.

    While Google is thinking about getting into other markets, companies like Hakia (http://www.hakia.com/) are trying to build a better Search Engine.

    I\’m sure these guys know their business better than we ever could, so maybe the Tech landscape is changing in such a way that drives them to get involved in more and more niche markets.

    As Mark says…only time will tell.

    Comment by Gizmoactive -

  10. We only have to wait and we will can answer to all the questions, until then we have to make our work.

    Comment by Catalin -

  11. I think it is a branding issue. Why would Google want to go head to head with little Apple? Although Apple is huge again, they have a well respected brand as does Google, and I think they would rather go against “big bad guys” like MSN. They also may feel that they make more money by selling the Adspace to Apple, and they may want to keep such a huge advertiser around rather than piss them off. If they enter the market, and there is a price war, the profits may disappear and lower their ad revenue more than the new product is making😉

    Comment by Corn Furnace Guy -

  12. I read two weeks ago that Google is getting into the radio ad business. If they do decide to get into the online music business, what would happen? Google MusikAdword. After each played song they will broadcast an 20sec ad, which scan the words in the song before and find the right ad.

    Comment by Daniel -

  13. Part of the problem is that your idea doesn’t support the one aspect that actually creates all that content – the Artist. The unfortunate result of all this is that the Artist isn’t getting their fair share for their creation, it’s being canabalized by the delivery system.

    Eventually the Artist and the Consumer will revolt.

    At least one could hope.

    Comment by Jody Whitesides -

  14. I do not think that the arb will work in the terms you described. i.e. give the song for free (cost 70 cents) in order to generate ad revenues (more than 70 cents). The reason is very simple, if you give something for free, then demand increases specially from the ones that will probably not buy from the ads.

    I think we are getting into an era where there is a saturation of ads and people are starting to get ad deaf/blind etc. To the point that probably people may be willing to pay in order to avoid adds/retain privacy, etc.

    Back to the songs, I believe that in the not-too-distant future song files will be encripted with programs that would auto-destroy it if more than x number of copies are made — then the industry will find a way to protect itself somehow. They will still have the problem of all the files out there without the protection.

    In any case, I get the general idea of your comment and it is thought provoking/discussion generating, etc. Well done!

    PS: Just this discussion proves that in this sector the situation is very fluid and can change very quickly which promts to question the valuation of the ones like Google — Reminds me of Texas Instruments many years ago or others whose names we do not even remember because they are long gone.

    Comment by Jorge Piedrahita -

  15. People are too addicted to the Ipod mp3 players. No one can quickly take down Apple without an awesome player and so far the only players that outdue Ipods are the newer ipods.

    Comment by spa covers -

  16. Oh, I also forgot to mention that SpiralFrog plans on doing this… http://www.spiralfrog.com/

    Comment by Gus Class -

  17. I’m sure it’s possible, but then I’m sure it would be DRM infested crap too.

    Comment by Matt -

  18. Interesting model for Google, however, the networks must still deal with the unions, WGA, DGA, SAG, AFTRA. Where do they fit into this equation?

    Comment by daniel -

  19. Just to be petty. It’s iTunes and iPod. Not… ITunes and IPod. You know that and I know you hate Apple. You made sure to capitalize everythign correctly with Google’s stuff.

    Comment by Jay -

  20. I would like to mention that Napster already offers ad-based revenue music playback from a web-based player on their site.

    The problem with getting music that can be copied to a device for free (ad-based revenue) is that the content producers will never let it happen… unless, as you say, the device manufacturers subsidize the costs in the hopes of making up for it with ad-revenue or device sales.

    I do not think that Microsoft is about to do this though as this would be competing with the playsforsure model and would most likely anger partners (Creative, iRiver, and so forth) resulting in a lawsuit.

    At any rate, I think that your idea is good, perhaps Napster should come up with a way to get free songs onto players. Perhaps build another device that works with their service and enables (meters) ads.

    Comment by Gus Class -

  21. The key is connecting the social networks and the content creators as well as protecting copyrights and providing residual royalites to the content creators.
    I have found a company whose philosophical and technological infrastructure supports these needs: http://www.9thx.com.
    The 9thXchange marketplace is the newest way to bring together buyers and sellers of digital content. The service dramatically reduces content piracy by offering the seller lifetime royalties — even on exchanges between consumers. Moreover, the service accommodates all technology platforms, file types and creators. I read about The 9thxchange in Crains Detroit recently. Reg Crandall

    Comment by regcrandall -

  22. http://www.blogmaverick.com/2006/11/02/evgeni-malkin-and-the-nhl-are-you-kidding-me/3#comments

    The Penguins are back up for sale! Did you see Crosby’s 6 points the other night!? There’s your chance!

    (I apologize for the unrelated nature of this comment)

    Comment by Nate B -

  23. Zune is a sad, complex little device that requires buying points and playing microsoft games while supplying an unsatisfying listener experience. I don’t see it making much of a dent in iPod coolness.
    Your idea about Google is interesting in a number-crunching clever sort of context, but in reality lacks follow through. If songs were free, the consumption would be so high that the royalty would be stratospheric. Ad revenue, on the other hand, would rely on clicks that listeners would never make since they would be busy hunting for free tunes.
    Finally, this ignores the real elephant in the room, the so called iTV which will allow video recording and playback from wireless hard drive connection. A cheap way but classy Apple interface for capturing and cataloging video would pop the livingroom market wide open.
    the iPod is a trojan horse.

    Comment by Phil Boiarski -

  24. Are those numbers based on the assumption that audio advertising has the same value as computer links or video? ‘Cause in this scenario I would embrace any technology that would enable me to clip audio/video ads from any music files that I download.

    I hosted a Christmas party Saturday night and put together a playlist that shuffled nine hours worth of music through my speakers. You think I want 5- or 10-second ads coming through after every song? No way under any circumstance. I’d prefer to pay $1 per song for ad-free music.

    And if the ads would be text-based ones that users encounter while searching to download music, I doubt their usefulness for advertisers. I’ve been using gmail for nearly a year and have yet to click an ad that appears alongside my mail. It would be the same if I were searching for music.

    Comment by Brian in Pittsburgh -

  25. I think it would be well worth it – especially if they decided to expand the market – go after boomers – especially boomer women. After offering a better option, then fine a way to make that better option mroe visible to those mavens who’s word-of-mouth can also reach those who’ve not yet jumped into this market: women 40+
    – Kare, SavvyHer

    Comment by kare Anderson -

  26. Mark: You buying the Penguins now that Jim B. has dropped out? Surprising that he did so in my mind – look at the season Crosby is having at 19 years old! What a draw. Do you know why he backed out?

    Comment by Jim Dorey -

  27. hey Mark, buy the Pens!

    Comment by Nick -

  28. Mark, Nothing about this entry, but in regards to your Nov 2nd one. Why not create an ownership group now…? The Pittsburg Penguins are one of the NHL’s hottest teams with many Superstars in the making, namely, Crosby and Malkin. Now that the RIM buyer has given up his bid, Step up to the bench.

    Comment by Christopher Hobrecker -

  29. Mark, I like your comments. Even if they are sometimes inaccurate, they are always insightful. Your theory regarding the “clash of the titans” is sexy, but not very plausible. It fails to consider the situation in context; particularly the political context. Isn’t it odd that you never hear any negative news about the relationship between Google and Apple? That is because, at least for now, they have a symbiotic relationship. Evidence supporting this is the fact that Eric Schmidt currently sits on Apple’s board of directors. I seriously doubt Google will attempt to cannibalize Apple’s market share in this space.

    Comment by wiseone -

  30. Mark, could you be more specific about how you see Google’s strategy translating into an actionable plan? Meaning, how will they “aggregate them [best media properties] in a manner that can pre-empt or displace the existing competition.”

    I understand the first part, but pre-empting or displacing is easier said then done. And why is Google in a defensible position to be the last man standing? Google Adwords is irrelevant for audio/video content, isn’t it? Additionally, if it’s just about th $575MM, there are several tech & media companies have deep pockets to participate in the content bidding war. The most sophisticated content owners know that the upfront payments are irrelevant. The question media companies will ask each candidate who has entered the race to license their content is, are you:

    (a) in the best position to monetize online audio/video content (with a massive ad sales network that’s proven for audio/video –which gootube, for all of its audience/brand attractiveness, and success with text ads, is not) *and*

    (b) willing to share in the wealth on the back-end?

    Look at the history of jazz musicians or garage bands and the record labels…or production companies and cable tv networks. Anyone who profited in any real, ongoing way from audio/video media either controlled their own distribution, or had a significant % of the backend. Beating a distributor at its own game may be too ambitious even for google. If I were Eric Schmidt I’d be eyeing a major partnership with Omnicom, Interpublic or WPP. They have a vested interest in leveraging UG content, they have decades-long experience and relationships with the nuances of Radio and TV media buyers, and together with YouTube they could dominate an entirely distinct media channel –effectively sidestepping the land-grab phenomena that most directly supports the old system of talent agents, stars and lawyers. It may seem utopian and naive, but if you don’t believe the premise that everyday undiscovered people are ready and willing to have their “talent” exploited, just look at Freemantle Media & the growth of that american idol / reality tv empire.

    Comment by Megan Cunningham -

  31. mark,

    please buy the penguins!! balsillie backed out after he found out he’d have issues moving the team.

    jason- pittsburgh

    Comment by Jason -

  32. My question – as admittedly a Macophile – is why? Why would Google need to or want to expend all this money and effort to get bigger in a market, without any innovation attached?

    Google would do it just because it can. Just to push others around?

    Why?

    Comment by Temple Stark -

  33. It will be interesting to see Googles advancement into the livingroom.

    Mike

    Comment by Mike Verinder -

  34. Interesting*

    I like the idea of http://www.RadioBlogClub.com which allows users to add Music & Songs to there Blogs or Websites*

    It also ties into Widgets which I think are going to Explode Online in 2007!

    Cheers! Billy ;))

    p.s. Ya gotta love that Canadian Basketball Star Steve Nash!!

    Comment by BillyWarhol -

  35. PLEASE BUY THE PENS!!! WE NEED YOU IN PITTSBURGH!!

    Comment by Dan -

  36. Hey Mark! Come out with a product to RIVAL THE BLACKBERRY and save our Pens! The Pens stay in Pittsburgh!

    Pens Leave= City goes to shit! There goes that new building you are financing…

    Here’s an idea. Buy the team the week of the NHL All Star game In Dallas. Pens play the stars 2 days later!

    Sorry for being selfish. But I love the heart you have for the Mavs. The Pens deserve the same.

    Comment by Meighan Nelson -

  37. Mark,

    I am a Stars fan and I want you to buy the Pens.

    I think that over time the major’s hold on music is going to weaken because they serve little purpose any more. They steal from both the artists and the customers. I anticipate that Apple will be cutting more deals directly with the artists and cutting out the majors. The only thing the majors are good for is bribing DJs.

    Comment by Joseph Simkins -

  38. The Penguins are back on the for sale block.
    Pittsburgh hopes you really meant it when you said you wished you had bought the team. They WILL get a Stanley Cup in the next few years!

    Comment by Steve -

  39. Nice site.

    Please visit http://free-web-hosting.cabspace.com or http://best-free-web-hosting.co.nr

    Comment by Mircea -

  40. Mark,
    This doesn’t really relate to ths column but one you wrote earlier and I couldn’t find it in the list. It looks as if Pittsburg Penguins are back up for sale with the withdrawl of Mr. Blackberry’s offer…
    You still interested???

    Comment by Benn Dunn -

  41. Mr. Cuban–

    OTT, and with all due respect…

    CUBES, YOU GOTTA BUY THE PENS AND KEEP EM IN THE BURGH!!! DID YOU SEE WHAT CROSBY DID TONIGHT?!?! CHECK OUT ESPNEWS!!! THE KID’S INSANE!!! FIVE CUPS IN THE NEXT TEN YEARS!!! CUBES!!! HELP US!!!

    Thank you for your time and consideration.

    Respectfully yours,
    Dr. William Agnew
    Denver, CO

    Comment by eyespy -

  42. Please save our Penguins!!!!
    Hey Mark,
    We’re all rooting for you to come in and be a part of the Sid show instead of just watching.
    We know you would be perfect for the team and the city.
    What do you say??? PLEASE!
    Chris
    Pittsburgh, PA

    Comment by Chris -

  43. Please buy the Penguins, now that Balsillie backed out we need you. The young talent, your hometown, please save the team.

    Comment by Dennis -

  44. $175 Million for Crosby, Malkin, Staal and Fleury.

    Come on Mark you know it is a steal.

    Comment by Matt -

  45. Mark,

    Jim Balsillie has terminated the negotiations to buy the Pittsburgh Penguins. You had mentioned in a previous blog that had you know really about the young superstars on the team and the future of the team.

    Well, this could be a huge oppourtunity to keep this team here. There is no way anyone wants to see this team leave. Hockey is my life and I would be crushed to see them go, especially after the Crosby/Malkin show we would be able to watch for nearly two decades to come.

    Please find a way!

    Joshua Panitzke

    Comment by Joshua -

  46. Good analysis, but doesn’t take into account two things: 1) the actual value of the music catalogs (which has been remarked upon above) and 2) the beauty of the iTunes/iPod product/system. As one who has used many different MP3 players as well as the iPod, the iTunes/iPod combo blows everything else away. And since Apple has IP protection on many elements of the interface, I don’t see anything coming along that will displace it.

    With Eric on the Apple board, I think we are far more likely to see a partnership with Google selling ads around the iTunes interface, including the store. Permanently killing the Zune in the process.

    Comment by bewert -

  47. Hey Mark. Love your blogs. They always seem to leave me pondering the ways of the world. At last it is time to return the favor: Just wanted to let you know the Pens are up for sale again.

    Comment by Billy T from PGH -

  48. Mark, I’d much rather see Google take over the distribution of video content. Everyone knows the biggest crooks in the world are in TV and cable. Heck, they charge us a monthly fee for their shows and also subject us to at least 8 minutes of commercials for every 30 minutes of programming! What a joke! Apple and iTunes give folks exactly what they want. Affordable songs (since you only have to buy the ones you want and not an entire CD), free podcasts, a great online store, and devices that play music and video flawlessly! I suggest you stick to basketballs and jockstraps!

    Comment by John -

  49. This is a great topic and can totally happen. Why would Google need to buy Apple? They could work together where the ipod becomes the one main platform that plays all the music that Google gives away for free. Keep in mind, that while album sales have decreased the demand for music never has… only the demand to pay for music. If Google/Apple could drive the majority of the people to their site for music as opposed to the 5% of buyers now why would they not be able to make up any fee through advertising – think about the potential foot traffic!

    This makes so much sense to me especially with all the convergence in other industries. Consider device convergence as everything from a laptop to a mobile phone to a television to a game console is now, arguably, the same kind of device: each consists of a microprocessor, a screen, some storage, an input device and a network connection. You can make phone calls on your laptop, play games on your mobile phone, and watch videos on your game console. Instead of four or more devices the future calls for a single powerful device that can perform all of these features and play Google/Apple licensed music efficiently (unlike current devices)! Think forward to the new device that is developed that does it all. People will want/need one and will upgrade their current ipod. It’s not going to happen overnight but with the correct roll out Mr. Cuban’s theory is very practical.

    Comment by Lee L'Heureux -

  50. Learn how to write English.

    Comment by chas corbeau -

  51. I’d rather see a big name tech company set up an online marketplace for independent musicians and small record labels.

    A lot of people don’t like the RIAA, don’t like the big record labels, don’t like DRM and don’t like the music that’s being marketed to them. Why make a major investment in an antiquated, broken, greedy distribution system? Why pay, and try to recover, over half of a billion dollars for content when there’s a ton of independent content creators that would give their content to you, for free, just for a chance to become famous?

    Here’s a quick list of things I think such a marketplace would need to do:

    1. Make it extremely easy for the artists to set up an online store to promote and sell their music.

    2. Let users rate the content and make it easy for them to find decent quality content.

    3. Add a social networking aspect that will help musicians, recording studios and local clubs discover each other.

    4. Encourage musicians to give away at least a couple of tracks for promotional purposes.

    5. Keep the music cheap. I’ve seen several convincing articles that suggest 25 cents a track should be doable.

    6. Have gift cards / pre-paid cards. People under 18 don’t have credit cards, but they’ve got plenty of money to spend on music. Does iTunes have any?

    Also, am I the only one that hears a number like $575 million and says, “Wow!”. Do you know what kind of promotions you could do with that kind of money, especially if you weren’t forced to work within the confines of the current industries business model and contracts?

    This should sum up what I’m thinking:

    Why buy a piece of the pie when you could build a bakery for less?

    Comment by Ryan -

  52. Eric Schmidt is on the Apple board, likely this will never play out.

    Comment by Alex Keis -

  53. The hope in the war, the seed in the old grudge, exhausted in the evil monster world!game

    Comment by ff11 -

  54. Too much consolidation isn’t a great thing. I hope GOOG never busy Apple.

    Comment by wailea -

  55. Google buys Apple….lordy!!! what that could create.😉

    Comment by Ron D -

  56. I can see microsoft trying an appraoch like that so they can reafirm dominance in a still emergent technology and lifestyle. Also the Zune needs many users to really max out its function of sharing music with other Zuners and free music to a user would be an incentive for more people to go Zune and then share the music. At that point, with improvements to problems made, The zune could get a head of steam.

    Comment by scott dearmore -

  57. This blog is interesting because it’s NOT just about basketball or the NBA. Mark is a businessman…so it’s good to get his take, and his thoughts, on business, trends, etc.

    Comment by basketball -

  58. Who cares about this stuff? What about Stern’s about-face on the ball?

    Comment by Mike R. -

  59. It’s a brilliant observation as usual. Dude, if you weren’t already a rich and famous billionaire, you’d be one soon.

    The exclusivity issues are not relevant here. If my ZUNE comes with up to 10,000 free tunes of my choice it won’t matter if I’m “allowed” to also pay .99 per tune to Apple, I’m not going to pay per tune anymore. Music scales perfectly in this case. Once created there is effectively very little extra cost to have the tune downloaded 100,000,000 times vs 1 time.

    Seems MS is the logical player here and they have the cash to make it happen.

    Comment by Joe Duck -

  60. itunes is run as an afterthought to the sale of ipods, and it shows. While the ipod experience is slick and easy, itunes is clunky and hard — and not only for users, but for the content providers too. There is a lot of content available that is not being promoted by itunes in any way, so the content companies, many of whom are already collarborating with Google/YouTube, have an incentive to do more together.

    Comment by behindthepen -

  61. Interesting note, but I should also point out the fact that Apple and Google have been getting a little cozy together what with seats on each other’s board, etc. The Google-takes-music scenario seems a little unlikely. The fact is, Google is already in far too many areas, and the music distribution business would stretch them thinner than they need to be, with, as noted, really poor margins.

    Still, it’s an interesting concept considering Google seems to want to get into almost everything online. And the comparison is right: Google is the Microsoft of the Internet. What we need right now more than ever is a “Linux of the Internet”. Google clearly has far too much power.

    Comment by data recovery -

  62. I do not think Google is ever going to go after Apple. The reason? The CEO of Google (Eric Schmidt) is on the board of Apple. I think it is much more likely that they strike some very cool partnerships in the next 12 months.

    Comment by Jeff Farley -

  63. The technology and model to implement Mark’s model exists. Check out http://www.lirix.net.

    Comment by Marc Cohen -

  64. “8. Microsoft already competes in one market where they take heavy losses on equipment sales to make a profit on accessories, video games. With estimates being around -$200 for each XBox sold Microsoft has already learned the rules of leveraging one aspect of a device against the sale of supporting components in order to make a profit.”

    That is wrong. This year MS is now making around $250ish for each core system and $200 for each premium system sold due to improvements in manufacturing process and components. Do yer homework son:)

    Comment by Matt -

  65. Apple has something like $10B in cash sitting in the bank with a market cap hovering around Dell’s with an outpacing of the PC market in machines sold by an enormous factor. So, sure, Microsoft could throw money at music publishers to try to unseat the iTunes store and subsequently the iPod, but it would only work if Apple’s business model was inflexible. Apple could easily wage a formidable defense and/or counter-attack.

    Comment by David -

  66. Mark- if ad paid content is a good recommendation for Google/Apple and the music business, what are you doing to shift our own businesses to more ad based content?

    I believe you are really thinking in the right direction here.

    As our world economy shifts away from material goods towards virtual goods (stuff that can be copied for free), we will approach a point where corporations can provide our “free bread and circuses”, a role usually filled by governments.

    Governments have traditionally grown based on their coercive ability to give away stuff they took away from others. Now that a lot of “stuff” can be duplicated at no cost, corporations (or individuals) can give away stuff and achieve government style influence.

    For now at least, I welcome our Google overlords. It is interesting to ponder where this “really free” market competition will lead us. In the long run it may be that every real world good or service we purchase will have a “virtual tax” built into it as the costs of those goods and services must be increased to include marketing costs paid into the virtual information economy.

    If ad based music is feasible now, Apple would be well advised to switch to that business model immediately. While Google is the leader in ad based content, the underlying economics (zero marginal cost goods) dictate that all content providers head in that direction.

    Comment by Trey Tomeny -

  67. There’s no question Apple has the design talent, but Google has marketing momentum, visitors (i.e. clients), and the “cool” factor.

    Comment by wailea -

  68. google ceo sits on apple board. will not f*ck with jobs right now. apple’s design and expertise in the hardware AND software space has them positioned to take over the living rooms of consumers. if you’re ever invited into someone’s private living room, you’ve won. apple has and will continue to win. google will come along for the ride.

    peace out.

    Comment by wes -

  69. If GOOG wants in, they’ve got the $s and the audience to turn any market upside down. Time will tell.

    Comment by basketball -

  70. Although it’s an interesting post, there are quite a few problems with how you see this possibly playing out Mark.

    First… selling advertising space around a song and trying to recoup $0.70 or so per download is so out of this world it’s crazy. How many ads or even google adsense ads do you click on when visiting a site. I understand adsense works quite well, but not nearly enough to generate that much per user who downloads or even per user who just visits the download page.

    Second… as some of the previous posts have eluded to… there are simply too many copyright problems with distibuting music in this type of way. So what if google pays $575million to the top record labels, they still have to control how the music is distributed and as we all know… Apple has done this remarkebly well. How would google distribute it for free without music (file sharing) going back to the days of Napster? I just don’t see how this can be accomplished all around selling advertising space around a music download.

    Third… Artists and record companies aren’t going to take a flat fee for their music. Why would they when they can already get paid based on the amount of music they sell. Performance based sales will always be more attractive to artists then a flat fee by a company like google.

    Fourth… back to Apple. They hold over 85% of the market share of all legally downloaded music currently sold and I believe even higher than that for all portable mp3 players (iPod). The iPod is their business here and it’s success has catapulted their sales in all facets of the computer and music industry. I can’t imagine they’re just going to sit back and watch their company go down the youtubes cause google wants to offer free music. Apple has shown they are innovators and always seem to be a step ahead of the rest of the computer/entertainment industry.

    Oh and as far as microsoft… they’re huge yes, but always trying to copy Apple and Google and besides the PC market, they haven’t shown too much innovation in quite some time. I haven’t seen one person with a Zune or even heard about anyone I know picking one up this holiday season. On the other hand… at least half of my friends have an iPod of some sort and quite a few people I know are either getting one this Christmas or buying one as a gift. I think Apple will be just fine.

    http://www.BryanHauer.com

    Comment by Bryan Hauer -

  71. The only problem here is the record companies and DRM.

    If they insist on DRM, then whatever you download from Google won’t work on the iPod. A lot of people own iPods. For those people, using Google’s service is not so-free. They have a $100-$400 investment that would become somewhat useless and require a new $100-$400 investment to replace (a GPod?) They still might do it, but it would be a tough sell, especially at first. That pretty much guarantees that downloads and thus ad revenue would be low at first and you’d be in the red big time for at least a year or two.

    Obviously this would be a huge threat to Apple. iPod sales would have to drop as new buyers would be drawn to a device that would let them play all the free songs from Google. Maybe they would try to copy the Google business model or partner with them so that the songs they sold used Apple’s DRM.

    If they don’t insist on DRM (and how unlikely is this..) then they’re going to want a lot more money. They’re not going to compare it to the business they are doing through iTMS, they’re going to compare it to iTMS + some P2P based calculation. Remember all those lawsuits the RIAA would bring against file sharers? That should give you an idea of the size of that P2P based calculation. I would say double the estimate, conservatively.

    If you go the no-DRM route, then people could still use their iPods to listen to whatever they downloaded from Google. They could also use any other MP3 (that’s the obvious choice for the non-DRM route) player. So people might be a little more willing to buy something other than an iPod, but the iPod is iconic. I doubt that its sales would be hurt all that much. As Mark mentioned, that’s where Apple makes money. So they probably wouldn’t care too much if Google was giving away music for free. It might even drive up the sales of the high-end (and thus higher margin) iPods.

    Comment by Michael -

  72. The problem here is that music is not something that can be consistently monetized. Any new music medium (whether cassette tape, CD, iTunes, Future Google Music Medium, etc.) will start off with a huge back catalog of music to sell. Albums going all the way back to the beginning of music recording. So people who had a whole collection of Beatles LP’s went back and bought the entire Beatles catalog on CD when they came out. This kind of thing inflated CD sales for the initial period of CD adoption. After that, sales slowly started to trickle down. The same thing should be expected of any new music medium, including iTunes. There’s no way that the current pace of iTunes music sales can be sustained indefinitely. There’s simply not that much new music being recorded. Eventually most people going to have pretty much all the music they want, and buy maybe 5 albums’ worth of new music per year.

    Two side notes:

    1) Physical media (LP, cassette tape, CD) can be re-sold. Digital media (iTunes et al) cannot. The secondary market for iTunes Music is 0. In the CD age, we had a lot of “music nuts” being able to sustain large levels of music purchases by continually selling back their old CD’s. This is impossible with iTunes or other purely-digital music, so (unless music becomes substantially cheaper) I don’t think the digital “churn rate” will be nearly as high as it was for CD’s.

    2) In the past, there were very limited means to transfer music from one medium to the next. You could copy tape-to-tape but it lost quality. Burning CD’s took time and a bit of money. Copying a digital music file takes little time and no money (aside from the hard drive space, which is renewable — just delete the file). At the moment, a CD is close enough to being a “perfect master” that can be morphed with little effort and minimal loss of quality into any other medium, analog or digital.

    Lastly, I doubt that music companies could make a profit based solely off of their current artists. Back catalog sales make or break the industry. The thing that everybody’s realized, but that nobody talks about, is that the cat’s out of the bag with respect to the back catalog. CD’s were DRM-free, and you can find pretty much any recording on CD, rip it to a digital audio file, and then share it with the entire world. Therefore, the “cash cow” for music labels is on its way to the slaughterhouse. The iTunes explosion was probably the last chance the labels had to monetize it effectively. Moving forward, NOBODY will buy the same music over again.

    The same thing is going to happen with video too, but it won’t be as drastic, as there are still improvements to be made to video quality etc. Also, I don’t think that the film industry is as reliant on the back catalog as the music industry, although I have no numbers to back that up.

    Anyway, the point of all of this is that monetizing music is going to be increasingly difficult, regardless of whether it’s Google or Apple or Microsoft that’s doing it. I really don’t see where MS is going with the Zune. It’s obvious to me and most others that the iPod is Apple’s Trojan Horse to get into people’s houses, heads and hearts. And it’s working. The music biz is just a means to an end for Apple. That’s why I’m scratching my head over the Zune.

    As for Google? Actually, what you say does make sense, and it may be the only money-making avenue left for music. “Making all music free (except for advertising)” is heading in the right direction, trend-wise. Eventually music will be free outright — really, it already is among those willing to break the law.

    Comment by Brock -

  73. Microsoft & Office vs. Google & ads

    The ONLY real difference (and it’s a great analogy) is that Office is something people paid to own – they wanted it. They beckoned it. Online ads are something the end user doesn’t want – we run popup blockers, spyware protection, and adaware to keep that stuff away from us. Now, online ADVERTISERS may want it, so they pay Google, but as ads get less & less effective and things like MySpace and networking get more and more effective, ads won’t be what Office was. I’m still using MS Word but I don’t think I have EVER clicked on a google adword on purpose.

    M

    Comment by Matt Antonino -

  74. That is just the nature of competition, which would make the already great Apple products even better for cheaper. And I really don’t mind that Microsoft foots the bill on that one…

    Comment by Gavin the photographer -

  75. just think about it…a google ipod…or something of the likes. that would be so cool! google is getting bigger and bigger. its amazing how its grown. who knows waht they’ll do next…but i think that google music is a great way to keep getting bigger

    Comment by Grayson -

  76. Well Mark, you’ve got enough money yourself you ought to be able to turn the market over yourself, just for fun…

    Anyway, very interesting post. I wouldn’t mind Google offering free music legally…

    Comment by AJL -

  77. I think that the internet is taking control away from the middlemen and giving more control back to consumers and the media creators.
    Projects like http://www.aswarmofangels.com/ show that there is incentive for even a million dollar movie deal to be funded for release under Creative Commons. The world just needs a centralized place for these kinds of deals to occur. There is one comming out at the beginning of next year.

    Comment by Brandt Cannici -

  78. If Google were to enter this market I think they should cut the major labels out of the idea and invest a fraction of the $575 million to introduce new music talent into the market.

    Comment by Craig -

  79. Mark Cuban, you are officially off your rocker. You really think that the music industry is going to put all its eggs in one basket by shifting its dependency on Apple to a dependency on Google? You might as well tell a drug addict that you’ll cure his addiction to crack by getting him hooked on heroin instead. You often have interesting perspectives on the internet world. This wasn’t one of them. Back to the Bat Cave for you.

    Comment by Tommo_UK -

  80. I disagree with you 50% of the time, but I’m completely on board with this analysis. Microsoft has the money to take on Apple here, affording to lose money to win in the long run (think XBox).

    I am actually excited to see what they do here. I’m about to get a Zune, just to play around with it. My iPod is getting boring lately.

    Comment by Robyn Tippins -

  81. Well given that Schmidt sits on Apple’s board and is very friendly with Steve Jobs, I’d guess Google will collaborate with Apple rather than compete.

    Google still doesn’t have an entry into the living room, Apple does. I can’t believe Apple expects people to suddenly start paying for movies and TV shows they can get for free, and Apple won’t start their own ad network (if they wanted to, they had the perfect opportunity with iTunes).

    But how do you target audio ads around music? do advertisers pick certain tracks and buy some impressions for it?

    So far Google’s baby steps into display ads have been weak and their ideas for the future are a little ‘out-there’ (remember when it was ads based on what you’re watching based on mic-input?), and check out Google’s new radio ad system; terrible for the new generation of accoutability in advertising.

    I may be wrong but my vision is the content being kept on the network’s end, not the user’s. Make an iPod without the storage, call it a cell phone and give it away with a monthly contract.

    Comment by Adam Cains -

  82. The only flaw in your analysis Mark, is that a price point of free (and legal), consumers will download a whole lot more than $1B worth of music. The cost of subsidizing music for Google (if it was free) would be in the multi-billions per year and not the $575MM your assuming. Google could potentially make that up in hardware sales… but the hardware would have to have more than music as a focus.

    Comment by Ro -

  83. Mark Cuban’s music licensing numbers are wrong: its 1 thing to receive $575m as a percentage of actual sales; it’s a whole other ball game for the music companies to agree to that low a number for CD quality music that will be given away for free by Google so they can sell ads. If your entire catalog is going to be available for free on the internet, why would you sell something worth billions for millions? It’s true that Google can come up with some game changing manouvers in the music space, but I don’t think Apple is selling so many iPods because they have a good music store- they are selling so many iPods because it is the best digital music player. As long as their music player remains the best & easiest to use, even if all the music was free, I bet Apple would continue to have the #1 selling DMP.

    Comment by Abbi Vakil -

  84. Microsoft already competes in one market where they take heavy losses on equipment sales to make a profit on accessories, video games. With estimates being around -$200 for each XBox sold Microsoft has already learned the rules of leveraging one aspect of a device against the sale of supporting components in order to make a profit. I think Microsoft could have eliminated Apple from the market if they launched the Zune with unlimited free downloads from their online store using the same model (give away music, make the profits up on the player and accessories). However, with the utter failure of their launch for the Zune (crashing software, no support for podcasts, unable to use the Zune while docked, etc.) it will take drastic steps for Microsoft to make a dent in the iPod at this time.

    Comment by Sean Foushee -

  85. I like what you’re saying, but you make these deals mutually exclusive. Even if Google out-pays apple, you have two big concerns: (1) anti-trust (with the exclusive license agreement), which is also a problem with MSFT–just wait the anti-trust suits will go after Apple and Google too someday; and (2) apple’s agreements with the labels – how can google or anyone else get an exclusive license when Apple already has the license–you need to know the terms of the bargain with apple and I’m sure they’re well-protected from competition.

    This is all extraneous to the last factor: people. What will consumers think?

    Comment by Preston -

  86. What format would the Google Tunes be in? DRM-free MP3s that could freely be shared and could cannibalize CD sales? Or another DRM scheme that won’t work on most portable music players? You’re thinking ahead to a day if and when the music companies get off the DRM crack. If that happens, and we’re starting to see baby steps, then its a whole new ballgame.

    Comment by Gerard -

  87. One thing in all these talks of subsidized liscencsing for music, or advertising fee based music. Is how do we continue to create a market for deverse and specialized music. In the mid 90’s music flourished with many genres and artists getting attention but the pop idol came and music became a banal push of just the top money makers.

    With these sortof blanket liscensing deals would the major labels only care about the top talent? I am already annoyed at paying for 100 unwatched channels of Cable TV, I don’t want my iPod to pay for 20 pop artists that I won’t even be listenting too.

    I think the real shift in the digital music distribution economy is going to be artists continuing to shy away from big labels altogether as it becomes more economical to distribute and market yourself online. The major labels will keep doing these stop gap techniques to monetise new technologies, but the real power in the new technologies is making the old distribution model obsolete. Apple probably isn’t too concerned with the ITS, but artists who can skip paying a high percentage of their music’s profit to the labels will start to use these stores in ways the Labels simply can’t.

    Comment by Brendan Piper -

  88. I read a week or so ago that Google is getting into the radio ad business. If they do decide to get into the online music business, does this mean they throw a 5-10 second ad on the beginning of a song and let you download it for free? All the songs you want just a catchy jingle at the beginning of each one or the end for that matter.

    Comment by Joe -

  89. very interesting post. i take your analysis not to music, but to cell phones/blackberry/pocket pc’s. is a clean (free) interface that provides email (gmail?), and other apps (docs, spreadsheets, maps) far from becoming the “choice” OS for a new gen of devices? will they partner w/a manufacturer to create their “apple ipod” version of simplicity done right but still let others use the platform?

    of course, eric schmidt on the board of apple adds another degree to this.

    Comment by surya -

  90. The process of deciding wether or not to invest in an idea like that makes me think of the many hours of math and research done to help make the best decision possible. So much linear algebra involved and calculus. I’m sure if such an investment was made, within the first quarter you could figure out exactly where you’re heading and wether or not to continue with the project. What a thought! we’ll see

    Comment by Troy -

  91. google microsoft or apple no matter what company they can only rule one.google with their advertising,microsoft with their os and office and so on..it will 99 percent never change.

    my 2cents

    Comment by Imran -

Comments are closed.