Jon Bon Jovi slams Steve Jobs for 'killing' music

[amirm]

Not really. Like the tablet, online music distribution and smart phones, Apple didn't invent the portable player, it just took it a quantum leap forward.

You say No but then say what I was saying . I said that Apple made portable MP3s mainstream. And since most people were not buying the music that got stuffed in it, they extended piracy that way.

I am. I'm still wondering how you can change to what is obviously a much more efficient manufacturing, distribution and sales model, one that actually eliminates many of the most expensive steps, only decrease the price by a little more than 20%, and lose money. The internet age has been a long string of business casualties replaced by new models. Music retailing is definitely one of them. Is Apple solely responsible for its demise? Largely, for sure.

Here is the story:

Steve goes to one of the major labels and asks them for 99 cent music. They tell him he is insane. Shouting match occurs and jobs tells them the most clever line: "I only have 5% of the PC market. Give me a short term contract and we will see if it works. If it doesn't, you don't have to renew." The label says Yes.

Jobs then, based on rumors of them potentially buying another label, gets that company to match the above. Now he has to major labels. The others are waiting. iTunes store is released and is instant hit. Record executives that did the deal are opening champaign bottles thinking this is all going to grow their business big time.

The other labels are now under pressure as their bosses are pounding on them for not being part of Apple's party. So they also do the deal. And the rest as they say is history as no one wanted to then pull out.

Had Apple been Microsoft with 90% market share, no such deal would have come about.

Of course, the labels did not think about Jobs promoting and selling iTunes and iPod for PCs. Somehow everyone thought it was a Mac only thing.

No analysis of business models was done by anyone. Deal was done for a trail and stuck. The law of indirect consequences in play here.

You say you shed no tear for labels. I ask you this: do you shed any tear for us? What if we can't get lossless audio downloads when physical disappears? Will you be OK with CDs and high-res of specialty content only? 'cause that is the future we face.

I see no other outcome. The only wildcard is if Apple starts to provide lossless downloads. If they do not, this hobby of ours will be different 10 years from now.

Did they do it at a loss, just to sell hardware? I remain unconvinced.

How can you be unconvinced? Here is some stats:

Apple had sold 10 billion songs by Feb 2010. This is $10B in revenue. If I use your highly optimistic number, they made $3B in gross profit before expenses.

During the same time they sold about 280 million iPods. Let's take an average price of $150 for each and we net $42B. Assuming a highly defensible profit percent of 50%, they made $21B from hardware sales. $3B vs $21B and we have not even included a single iPhone! Take out operating cost for selling music which don't exist for the hardware (they are built into the 50% number i used), and you get 20:1 ratio of hardware profit to software if not more.

Schick invented the concept of razor and razor blade. Apple masterfully reversed the equation and made boatload more money.

I know this stuff sounds controversial but they really aren't to anyone close to these businesses.

 

[Steve Williams]

You say No but then say what I was saying . I said that Apple made portable MP3s mainstream. And since most people were not buying the music that got stuffed in it, they extended piracy that way.


Here is the story:

Steve goes to one of the major labels and asks them for 99 cent music. They tell him he is insane. Shouting match occurs and jobs tells them the most clever line: "I only have 5% of the PC market. Give me a short term contract and we will see if it works. If it doesn't, you don't have to renew." The label says Yes.

Jobs then, based on rumors of them potentially buying another label, gets that company to match the above. Now he has to major labels. The others are waiting. iTunes store is released and is instant hit. Record executives that did the deal are opening champaign bottles thinking this is all going to grow their business big time.

The other labels are now under pressure as their bosses are pounding on them for not being part of Apple's party. So they also do the deal. And the rest as they say is history as no one wanted to then pull out.

Had Apple been Microsoft with 90% market share, no such deal would have come about.

Of course, the labels did not think about Jobs promoting and selling iTunes and iPod for PCs. Somehow everyone thought it was a Mac only thing.

No analysis of business models was done by anyone. Deal was done for a trail and stuck. The law of indirect consequences in play here.

You say you shed no tear for labels. I ask you this: do you shed any tear for us? What if we can't get lossless audio downloads when physical disappears? Will you be OK with CDs and high-res of specialty content only? 'cause that is the future we face.

I see no other outcome. The only wildcard is if Apple starts to provide lossless downloads. If they do not, this hobby of ours will be different 10 years from now.


How can you be unconvinced? Here is some stats:

Apple had sold 10 billion songs by Feb 2010. This is $10B in revenue. If I use your highly optimistic number, they made $3B in gross profit before expenses.

During the same time they sold about 280 million iPods. Let's take an average price of $150 for each and we net $42B. Assuming a highly defensible profit percent of 50%, they made $21B from hardware sales. $3B vs $21B and we have not even included a single iPhone! Take out operating cost for selling music which don't exist for the hardware (they are built into the 50% number i used), and you get 20:1 ratio of hardware profit to software if not more.

Schick invented the concept of razor and razor blade. Apple masterfully reversed the equation and made boatload more money.

I know this stuff sounds controversial but they really aren't to anyone close to these businesses.

Amir

having read your post all I can say is thank goodness for the shrewd marketing Steve Jobs did and that I own Apple stock Isn't this what a CEO does to make a company successful. As Jack said the market was ripe and someone had to be first to do it

 

[amirm]

Jobs is masterful. No doubt about it. He can get away with anything and do things others cannot. I will fault the outcomes, but not the man .

He figured out a way to make boatload of money from hardware, in an environment where the entire consumer electronics could not. He realized that the key was software, user interface and design, plus services. CE companies are weak in almost all of these areas. We talk about labels but the CE industry has gotten killed far more than them by Apple's success. Phone companies like Nokia were next. Had Google not stepped in, that industry was going to be toast too.

 

[Phelonious Ponk]

Amir I'm not questioning whether or nor Apple makes more selling players than they do selling music, I'm questioning the industry rumor that they lose money selling music. That was the premise that this entire argument was based on: Apple has ruined the retail music business, sucked all the margins out of it by running iTunes at a loss just to drive the profitable sales of iPods. That iPods are more profitable than iTunes does nothing to make that story more convincing. That the record labels may have been duped by Jobs doesn't support it either. We still have a business model that we have every reason to believe is much more efficient, but we're supposed to believe is much less efficient, unprofitable even. I'm sure you have the benefit of all the inside rumors, but it just doesn't add up. Are those rumors coming from people left standing out in the cold, unable to compete? I'd rather go on data.

By the way, if that story about Jobs and the labels is true, boy did he take those guys. I guess when the contracts run out they'll all pull out of iTunes and start their own online stores selling albums only, at much higher prices than the unprofitable iTunes. It sure wouldn't make sense to stay with a money-losing proposition any longer than you were legally obliged to.

By the way again, physical media doesn't have long to live, but I wouldn't worry too much about the loss of lossless files. I wouldn't be at all surprised to see lossless files available on iTunes within the year. And if Apple doesn't do it, that's what's called a market opportunity. You just have to be able to figure out how to eliminate manufacturing, packaging, shipping, warehousing and bricks and mortar retailing and still make a buck.

Tim

 

[JackD201]

Hi Amir, These are just some of my observations and their resulting questions and opinions.

Doesn't the label get something like half of .99 for standard and half of 1.29 for plus? If they sell Hi-rez which the labels already have and just to hand over, they'll be getting about half of 3 dollars or so. That's 3 times more for something they already have and will spend peanuts for to get on the "shelves". The labels can make a killing and so can artists. Actually what we're seeing is big labels shrinking and artist labels flourishing. Practically every A-lister has his own label, that predates, MP3 but today you don't have to be an A-lister. We haven't seen a direct to download block buster yet but we have many examples of how viral videos have launched many a career. Artists are not at the mercy of radio stations anymore either, that's another angle worth looking at. Twitter, MySpace, Facebook and Apple's music specific Ping.

I really believe Apple will support Hi-rez just as it has added support for RAW in iPhoto because there's money to be made. Lets look at some trends. The laptop is becoming or has become the computing device of choice. I believe 2009 was the year laptop sales topped desk top sales attributed to students. What are the biggest drivers in upgrading hardware? Speed and Memory. At 2 Gigs for about an hour's worth of Hi-res, we're looking at a lot of new computers sold to those who chiefly prize mobility. What are the planned obsolescence time tables? Every company has one. In this scenario the future doesn't look very bleak.

Now let's look at the current HD providers. Are they charging the 3 bucks and change because they have to spread out the licensing costs over smaller unit sales volumes or simply because they can?

Now here's where Apple has to watch their back. The premium pricing for all their products is spurring the underground to come out with a lot of things. Any code can be hacked and cracked. In Asia there's something going around called the Hack Book. Basically PCs hacked to run bootleg OSX. As Apple's success grows expect more of these things to follow.

 

[Steve Williams]

Amir

I really believe you're all alone in this one my friend

 

[JackD201]

I also believe Bon Jovi has to take at least some responsibility for the recording industry's woes.

No cameos could save this song.

 

[Old Listener]

If you're getting a 32 megabyte player, I think we're assuming you're putting a large, ripped CD collection on it. And for that reason, as we've moved deeper into the era of the download, the iPod Classics, with their hard drives, have been surpassed by Nanos and Touches with flash memory. That's what kids are buying.

People use iPods in different ways. I use an 80 GB iPod for music in my car on trips It has a large, static subset of my music collection in MP3 format. Using ALAC or AIFF or WAV files would have reduced thew number of files I could store so much that my strategy failed.

... I remain unconvinced.

I'm with you Tim. Amir's arguments may be quite logical and based by real insder knowledge. As a consumer, I'd not buying it.

I expect low prices now: $ 7 or less for a CD including shipping or $ 0.99 for a one hit wonder MP3 track download.

Bill

 

[amirm]

Amir

I really believe you're all alone in this one my friend

I need to remember this line, next time someone says they can cure ther cance with vitamins and you try to tell them otherwise .

 

[amirm]

Amir I'm not questioning whether or nor Apple makes more selling players than they do selling music, I'm questioning the industry rumor that they lose money selling music.

Your clarification is iimmaterial Tim . Look at it this way. Before they rotted, you could buy a portable CD player for $25 at Target. At that time, CDs were about $12. Profit margin in the hardware was zero to minus. Record lable profit was $10+

Now the Apple music player costs $150 to $300, and people buy tracks at $1 and leave the rest of the tracks to rot. Apple makes $75 to $150, label makes $2 to $3 depending on how many tracks are bought.

Whether they lose money or break even does not matter in this argument. Either way, they have zeroed out the potential for anyone to make money from selling music. All the money is in hardware.

 

[JackD201]

Amir,

I have about 4,000 purchased songs. I think that's pretty much split between the artists and Apple and all they had to do was send them one CD. It's hard to say lable profit was $10 plus because a lot of people wouldn't pay the 14 or 16 or 20 dollars for just a couple of songs. If we factor in opportunity losses, the differential could be a whole lot smaller. Factor in the 3 dollar costs for promotion, CD manufacture, artist's incomes and residuals and it gets smaller still. What is not shown is the risks labels avoid in this business model or rather the bombs that successful records subsidize.

Jack

 

[Phelonious Ponk]

Now the Apple music player costs $150 to $300, and people buy tracks at $1 and leave the rest of the tracks to rot. Apple makes $75 to $150, label makes $2 to $3 depending on how many tracks are bought.

You still haven't shown that iTunes is a losing or break-even proposition for Apple, you've merely speculated that the loss of profits in the music industry is due to the fact that they have chosen to sell individual songs through this distribution model. There are some potential solutions to that problem; adjusted pricing models, alternate retail channels, promotion of the product people buy, songs, instead of the one the record companies still wish they could sell. But the real solution is better products. Offer an EP with five good songs instead of an album with one or two keepers and 10 fillers, turn out 3 EPs instead of an album every two years and you'd pretty quickly adjust to the new paradigm. The savings in manufacturing and distribution should cover the additional marketing costs and then some.

Of course selling four or five good songs instead of one still wouldn't generate the easy profits the industry got from selling 10 or 12 crap songs as the price of admission for getting to the two good ones. If you want to give Jobs credit for making money by making things much better for end users, fine. It's not the first time that has happened.

Tim

 

[Steve Williams]

I need to remember this line, next time someone says they can cure ther cance with vitamins and you try to tell them otherwise .

now you're being silly , comparing apples to oranges. I fail to see the analogy

 

[garylkoh]

Whether they lose money or break even does not matter in this argument. Either way, they have zeroed out the potential for anyone to make money from selling music. All the money is in hardware.

Now I know why it is so hard for high-end manufacturers to make a living. Sell hardware...... wait, isn't what you and I are trying to do?

 

[naturephoto1]

Now I know why it is so hard for high-end manufacturers to make a living. Sell hardware...... wait, isn't what you and I are trying to do?

Gary,

But you aren't selling mass produced hardware in the millions of units.

Rich

 

[Steve Williams]

But I'll bet he wished he were

 

[garylkoh]

But I'll bet he wished he were

Not if Apple's my competitor

 

[DaveyF]

Your clarification is iimmaterial Tim . Look at it this way. Before they rotted, you could buy a portable CD player for $25 at Target. At that time, CDs were about $12. Profit margin in the hardware was zero to minus. Record lable profit was $10+

Now the Apple music player costs $150 to $300, and people buy tracks at $1 and leave the rest of the tracks to rot. Apple makes $75 to $150, label makes $2 to $3 depending on how many tracks are bought.

Whether they lose money or break even does not matter in this argument. Either way, they have zeroed out the potential for anyone to make money from selling music. All the money is in hardware.

Amir, you are postulating here and really do not know the complete business plan that Apple employs in regards to itunes. I seriously doubt that a company like Apple is in a venture that is continuing to lose money. If you believe that, well

 

[amirm]

now you're being silly , comparing apples to oranges. I fail to see the analogy

OK, I will be serious Steve. As I noted earlier, I used to make a living in this space. We had our own music service and hence, I am well aware of the label and etailer margins. I also know the operational cost. I also know the R&D costs. As I noted, we went though this twice: once with MSN music and next with Zune.

The analogy was that you know whether a medical claim makes sense to you vs to a person not privy to years of education, training and experience you have.

 

[amirm]

Amir, you are postulating here and really do not know the complete business plan that Apple employs in regards to itunes. I seriously doubt that a company like Apple is in a venture that is continuing to lose money. If you believe that, well

I am not following your logic. Every new DVD or CD is sold at a major retailer as a loss. It is designed to get you into the door once a week or two with the hopes that you buy something else while there. It is a proven retailing technique. Razor and printer companies lose money on the initial hardware, hoping to make it in consumables. Game console companies other than Nintendo routinely sell their hardware at a loss as to make it up in selling the software. That Apple does it in reverse, should not be a surprise. It is a powerful technique and works.

BTW, I am not saying Apple loses money. I believe they run it at near break-even point. Enough to not be a drag on them, but lacking any air for any competitor to breath in that space. Or dare to get in if they have nothing else to sell because of it.