Skating Toward the Digital Music Puck

“Don’t skate to where the profits are, skate to where the profits will be.”

This Clayton Christensen saying, modeled after what Wayne Gretzky supposedly said about how to be a successful hockey player (actually said by his father Walter as basic training advice) lies at the heart of the shift which is going on in mobile digital entertainment right now.

Back in my very first post on this blog I talked about the closing the “experience gap”. In the immature stage of an industry, a vertically integrated system is required to create a user experience that is satisfying to a broad range of people, because none of the components are yet good enough or standardized enough to allow a good system to be assembled from off-the-shelf components.

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This is what Apple did with its digital entertainment ecosystem: iPod, iTunes, store, and underlying technologies (OS, DRM, Firewire). In this situation, as Apple has well proven, the profit is made from the system, not from the components.
 
Using Christensen as a starting point, in my post I talked about how as an industry matures and the experience gap is closed, the tide shifts and it becomes possible to make satisfying experiences out of components created by others. The value (and profit) then shifts from the system maker to the component maker, according to Christensen.
 

In mobile music the early attempts (Rio, Napster, MusicMatch, etc. and often bundles of these) were prematurely modular and did not satisfy because they did not provide a good enough experience. Apple changed that. But now we see a shift happening again which may signal the end of the need for vertical integration. Yesterday Motorola announced its new line of Razr-derived handsets which have a heavy emphasis on mobile music and movies, and which look to be more integrated with desktop apps, other mobile devices (one communicates with an iPod) and services like Napster.

More significantly, few weeks ago EMI announced that it would make its catalog DRM-free and that Apple would offer it through iTunes for a premium price (with much higher bitrate encoding also - a combination well worth the extra 30 cents in my mind). Today Amazon has announced that they will also start selling the EMI catalog on its site in mp3 format (no word on bitrate).

What this does is remove a key component from the system as a dependency: the DRM technology and the tie that creates to a particular hardware platform. It also indicates that the music catalogs themselves are going to be more “standardized” in the way they are offered to and interface with the digital distribution and playback systems on the market. Notwithstanding custom contracts that need to be nogotiated on royalties, this is a huge step to allowing any number of companies who want to provide access to digital music for their customers to much more easily put together a system that will do that. Mobile phone carriers are surely first in line here.

But let us get back to skating to where the puck will be. The question that comes to mind is, has Microsoft skated to where the puck is today (creating an integrated system) and missed where the puck is going to? At the moment the answer appears to be yes. Having said that, the shift to a more modular architecture in the industry is not going to happen overnight, and the movie and TV business (which Zune puts a heavy emphasis on) are 2-3 years behind music in terms of DRM thinking. So there is still time to adapt. But if Microsoft (and others including Apple) want to make money in the future in digital entertainment, they are going to need to shift their business models, system architectures, and mindsets to a modular approach.