Thursday, July 31, 2008

Napster and Amazon

Here are two Fortune stories on CNN about digital music that show what's wrong with the music labels' expectations, and the only way to survive under the labels' regime.

The first is about Napster's problems as a digital music pure-play trying to survive on the razor-thin margins it makes on music. Napster has never been profitable.

The second is about Amazon's MP3 store and its (and Apple's) successful big box store strategy of using music as a loss leader to get customers through the door, hopefully encouraging shoppers to attach other, higher margin, items to their purchases.

Apple doesn't care that they're not making money on music purchases. They're making tons of money on their iPods, and some more on iPod users who are switching from Microsoft to Apple PCs. Yet, the labels continue to allow Apple to define the market prices for music downloads.

The major music labels insist their content has intrinsic value. Unfortunately, the digital market disagrees - and the customer is always right.

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