Brussels Agrees with Common Sense Advisory on Digital Music

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Posted by Benjamin B. Sargent on April 3, 2007 in the following blogs: Web Globalization
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While the Press has focused on compatibility and DRM as the bogey men of the digital music market, the real issue in online music distribution is cross-border trade constraints due to the archaic contractual underpinnings of international trade in the music industry. This week the European Commission revealed that its much discussed antitrust investigations target this very issue -- exactly what we meant by saying: "It's up to the labels (and yes, they could use a nudge from regulators)."

The fact that consumers can purchase music only from the iTunes store of their country of residence is not a "cool idea" cooked up in Silicon Valley. It undercuts the very nature of online business. Amazon has similar problems in the book industry, although less cut and dry.

We pointed out that: "Stores such as Apple's must ink distribution agreements and report royalties on a country-by-country basis, effectively limiting online purchases."

It's doubtful that, given contractual freedom to do so, Apple would choose to swallow the extra cost and effort of managing separate websites, financial mechanisms, and distrubution operations for each country if they could serve those markets from a unified technology and logistical hub. That is fundamental to business globalization in an online world and the subject of much of what we research, present, and deliver here at Common Sense Advisory.

By limiting consumer purchases to online stores that serve a particular country, Apple loses, the consumer loses, and in the end, the music labels lose. Why does this problem exist? That's how business is done in the music industry. It's old school. To change the business structures of globalization will require the big music companies to rewrite their organizational DNA, from command and control reporting trees, to financial reporting of P&Ls, to cross-company reporting of royalties. Without a governmental body willing to take them to court, it would never happen. Expect these companies to throw everything in the book at the Commission in a desparate attempt to avoid change.

But for an industry searching for lost profits, updating their playbooks to 21st century realities could be a very good thing indeed.

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