Why Sony’s iTunes competitor will fail – and how they could (but won’t) make it work

Back when the Playstation 3 was in the works, I wrote a lot about Sony’s misguided strategy for the console. My doomsday scenarios haven’t come true, but the company is definitely struggling — losses are projected at $674 million this year after $2.6 billion in losses last year, according to BusinessWeek. (“The two worst-performing products: TVs and video games.”)

So it’s great to see Sony has more dynamite ideas up its corporate sleeve. Like building an iTunes-like service. Because everyone knows consumers are looking for yet another site where they can pay to download movies/shows, music, and books!

Surely Sony has some secret sauce that’ll make this service stand out from the zillions of other similar services, both living and dead. Take it away, BusinessWeek:

Sony will try to differentiate its service from iTunes. One example: Users will be able to upload videos shot on camcorders, save photos taken with digital cameras, and post other digital content to their personal online accounts. … At some point down the road, Sony would consider letting independent software developers create applications for the service, much the way Apple does for its iPhone.

[Slaps forehead as crickets chirp.]

There’s nothing wrong with Sony trying to build up the Playstation Network library to compete with Xbox Live. But as a plan to turn the company around, it’s a joke.

The problem isn’t just that there are tons of similar services, or that Sony is notoriously adept at crippling hardware and services with DRM and proprietary formats.

The problem is twofold. First, nobody is catching up to iTunes’, or even Amazon’s, music market share anytime soon. Second, the movie/TV download market is still held back by pricing problems, people’s preference to watch movies and shows on a TV, and, most significantly, “release-window” rules that are incompatible with an online-entertainment future.

The L.A. Times’ Ben Fritz and Dawn C. Chmielewski summed up the latter difficulties in an article about Best Buy’s plans for said future:

Beyond competition from free content that can be illegally downloaded, the primary obstacle has been a complex set of rules imposed by studios, which are attempting to nurture their digital distribution businesses without threatening their existing lucrative deals with movie theaters, retailers and pay cable television networks. The result is that consumers often can’t access movies they want when they want them because a film has entered a period of exclusivity during which it is available only through a single distribution outlet, such as the premium cable channel HBO.

If those outdated release-window deals ever die, it’s likely Apple and/or Netflix (and cable companies) will be the distribution beneficiaries.

There’s only one way Sony could conceivably challenge iTunes for music supremacy. This strategy could also lay the groundwork for winning the inevitable movie/TV download wars. But it requires changing the way the music business works.

Sony should get all the record labels to build a jointly owned online music service. The service should undercut all other music store prices by a lot — say, DRM-free MP3s for 50 cents each/$5 an album for older music and 70 cents each/$7 an album for new releases. Even that might not be enough to compete with the iTunes/iPod/iPhone ecosystem, but it would at least have a chance.

The record labels should have done this from the moment Napster first emerged. But they still can pull it off — and only the record labels can pull it off.

If they do this (collectively) in-house, they don’t have to pay a cut of each sale to a technology middleman. And by collaborating, the costs of developing and hosting the service can be shared.

Even with those cost savings, could such dramatically lower pricing work? I don’t know. But since iTunes launched in 2001, nobody has provided a justification for charging 99 cents per track/$10 an album (still the standard, even with variable pricing increasing). It was just accepted as the standard, even though physical CDs routinely sell for $10 at Best Buy and Wal-Mart. (Yes, those are loss leaders. But online stores don’t have packaging and physical distribution costs or a physical retailer’s overhead.)

Almost nine years later, I have yet to see an in-depth analysis of what online music — or online entertainment in general — “should” cost. (Please post a link in the comments if you know of any such articles.) The only attempt at such an analysis I’ve read is a section of Chris Anderson’s 2004 long tail article in Wired; he estimated online music should cost 79 cents per track to reflect the savings from digital delivery.

But there are far greater potential savings, given the changes in the music industry over the past decade. As I wrote in a 2006 review of The Long Tail (the book, which unfortunately did not include the article’s pricing discussion):

[Anderson] assumed that “the costs of finding, making and marketing music” will stay the same, “to ensure that the people on the creative and label side of the business make as much as they currently do.”

But a lot has changed since October 2004, when the article appeared. Cheap recording software and video equipment and easy distribution methods like YouTube have allowed millions to contribute to the entertainment long tail. MySpace and new tastemakers like Pitchforkmedia.com and myriad blogs have upended traditional marketing and talent searching. Playlists and recommendations have replaced the function of radio for many people.

The Long Tail thus shows that much of the cost of the industry’s “creative and label side” is merely money wasted on casting about for the next blockbuster.

Even if Anderson’s long tail predictions haven’t entirely panned out, Soulja Boy, Bon Iver, Animal Collective, and any number of recent Pitchfork faves all point toward the same reality: The music industry as it has existed for the past several decades is unsustainable and unnecessary.

Of course, admitting that and adopting my plan would force the major labels — from label chiefs down to aspiring millionaire pop stars — to leave the illogical zillion-dollar entertainment bubble and become more like normal businesses. And while the movie and TV industries are still in far better shape than the music industry, that won’t last forever. A total rethink of how they sell music would help the big entertainment companies prepare for similar disruptions in movies and TV (Hulu is also good preparation). That, too, would require contemplating leaving the bubble.

Which is why, instead, Sony honchos pretend that letting people upload photos will magically save the company.

If I were a shareholder, I’d hope they stop pretending soon.

UPDATE: Added obvious references to cable companies and Hulu.

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