But someone did take the SDMI and the DMX experiences and lessons to their advantage, and made another push for the legitimate online market. By early 2002, Apple has already released iTunes software for the management of the digital music files, and their first iPod, for the portable listening of those files. Now they were ready to do some real business. And to do this they needed major labels to license their music to Apple, so Apple can be selling it on its planned iTunes online store, which was the last piece of the puzzle needed to ignite the machine. Without that, the whole thing would become just another little software, and another portable digital music player. So Steve Jobs started calling the labels’ executives. A few details got ironed out. The songs would be encoded as AAC files, protected through the system Apple called FairPlay, which does not allow for having a file bought on the iTunes store, copied on more than 3 computers. And, of course, it couldn’t be played on any digital player except iPod. And the files could be copied onto as many iPods as you want. OK, so how did the labels react, as Steve Jobs called to explain the deal? First, he called Warner Music. The top management loved it. Sold. Then Universal. Not in love with the idea, but Warner was in, so they went in too. Sold. BMG. Sold. EMI. Kicking and screaming, but in. Sold. Sony. Well, they were a holdout. And you can understand how hard it must have been to make such a decision for Sony. It was an electronics company too. Made all kinds of consumer music devices. Conquered the market with its revolutionary portable cassette player, the Walkman. Was leading the portable CD players market with its Discman. And now it was supposed to hand over the whole new area of the market to Apple and its iPod. So, of course, they were a holdout. But, one day, a few months before the iTunes store was to go live online, Steve Jobs called Sony Music execs back, and basically told them that Apple will unveil the store and commence the music sales through it, with or without Sony. Well, they simply couldn’t afford to be the only major label not in on this thing. So they relented, and went in with the others. And so, in April, 2003, the iTunes store went live. Well, that almost looks too easy, doesn’t it? How is it that all those labels that for years couldn’t agree on anything about the online commerce system, now, in such a rapid succession, went in with Apple and its iTunes store? Several factors were at play here. First, Apple represented only 5% of the computer market. The labels figured, can you really screw up that much on the playing field of just 5%? Surely not. So let’s play and see where this goes. Second, Steve Jobs made it known to all the labels that Apple’s marketing budget was 80-100 million dollars a year. Wouldn’t they want to ride that train? Third, surely Microsoft would react, and come up with its own platform quickly and try to compete with Apple in this new area, and the labels would profit from the competition, right? And lastly, and probably, most importantly, there was Steve Jobs himself. With all the genius, capability, success, power, and charisma that he was. When the labels’ execs were dealing with each other, at all those SDMI and DMX meetings and negotiations, they were dealing with peers and competitors and partners and colleagues. But when they were dealing with Steve Jobs, they were dealing with the legend. As much as some of them don’t like to admit it to this very day, they were star struck. And they all gave him much more, than they would’ve done with anyone else, before or since. No, the deal was not exactly great for the labels. Apple fared much better in the whole thing. It was selling, at the time, 399-dollar iPods. The labels were selling 99-cent songs. Not exactly a nuclear science to see who would have harder time accumulating profits. Just six months after the iTunes store opened, Apple released a Windows version of iTunes, and expanded its market exponentially. More people using iTunes, more iPods sold. Apple was flush in profits. Several years later, mostly due to the insistence of the labels, Apple dropped the FairPlay system protection, so the iTunes files would became compatible with other digital music players, and the store’s sales consequently continued to climb. And so did the iPod sales as well, since by now, the iPod became not just a popular digital music player, but a symbol of cool, and now. Its white headphones dangling from the ears of millions around the globe, were not just a product anymore. It was a lifestyle. Filled with songs and music. The songs were the fuel for the iPod car. And so that symbiosis, at the first glance, seems equitable and profitable for both, the labels and Apple. But while you can’t download a free iPod, you could, and still can, download a free song and listen to it on that iPod. And so iPods got filled with thousands and thousands of songs, only a small portion of which are legitimately bought. And when new models came out, millions lined up in stores and online to get one. On the other hand, when new songs came out, millions exchanged them and spread them around for free, and still do. So it’s not hard to see how the bottom line of Apple went up, while the bottom line of the labels continued to go down, even after the iTunes deal. But, as I said before, the things were at least finally starting to change and move forward when Apple entered the picture. No, the profits didn’t go up, but that’s because the industry still didn’t figure it all out. It’s a tough, high mountain to climb. But at least it stopped dreaming of the old business models, and of the status quo, and was finally immersed in the reality of the new marketplace, and was facing forward. The iTunes store shows that it can be done. That there is a legitimate music market online, and that that’s where the future is taking us. There are many twists and turns on that road already today, but if we figured out how to create value in the music industry, out of the recorded music phenomenon over a hundred years ago, and out of the seeming menace of radio and television, and out of sneaky little cassette tapes, and out of the CD technology, we will harness this one too. It’s just a matter of time, vision, creativity, and hard work.
