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Music is the canary in the coal mine for TV and film content’s transition to the Internet.

Stewart SchleyFrom a critical viewpoint, 1999 wasn’t exactly the best year ever for popular music. The top-selling album was the forgettable “Millennium” by the Backstreet Boys, followed at No. 2 by Britney Spears’ pop candy toss-away “Baby One More Time.” Worse yet, The Verve broke up that year.

Even so, 1999 was one terrific year for the music industry. Sales of recorded music in the U.S. hit an all-time high of $14.5 billion as fans bought millions of CDs, snapped open their jewel cases and popped the gleaming discs into CD players, PCs and boom boxes. “Hey now, you’re a rock star,” sang the band Smash Mouth in a 1999 hit that mocked the industry’s buoyant spirit. “Get the show on, get paid.”

Nobody knew it then, but 1999 would turn out to be the music industry’s own swan song – a last beautiful note before the deluge began.

Not coincidentally, 1999 was the year a new entrant hit the music scene: Napster. The oddly named system for connecting computers and enabling the easy exchange of digital music files quickly won the adoration of young music fans who, for the first time, could choose between buying multisong CDs for $20 a pop at the record store or downloading the best tracks for free from home. They chose free.

Napster and a new breed of similarly minded file-exchange networks, of course, ran into immediate legal challenges from a terrified music industry that had seemingly been dozing as the building blocks for a new music distribution platform – easy-to-use encoding techniques, high-speed Internet connections and proliferating PC penetration – were growing up all around them.

Setting aside the legality of what it was up to, there’s no question Napster was a runaway hit. Its adoption rates weren’t just impressive, they were downright gaudy. At its height in 2001, Napster’s peer-to-peer file-exchange network was used from home by 14 million unique users in the U.S. and more than 26 million globally.

In calmer moments, when they weren’t apoplectic over the outright thievery Napster had enabled, music industry executives couldn’t help but take notice of a sea change in consumer behavior that Napster exposed. Labels, scurrying to both deter and embrace new digital delivery models, advanced what seem, in hindsight, to be misguided initiatives to play to the digital crowd. Universal Music, for one, conceived of a grand Web portal that would arrange content from its artists under a single URL, apparently overlooking the reality that almost nobody cared about (or even knew) which label their favorite artists happened to be signed to.

The recording industry’s grudging acceptance of digital delivery was too slow, too corporate and too late. It wasn’t until 2001 that a truly inventive solution came to the market, adroitly blending content access, networked delivery, attractive playback devices and ground-breaking navigation architecture. Apple Inc. didn’t invent digital music delivery when it launched the iTunes platform, but instead wrestled it to the ground by introducing simplicity and convenience. Now, remarkably, the very culture of music consumption has changed, with outright theft giving way to willful payment. Even Napster is legit today.

The economics, though, haven’t caught up. According to a recent analysis of music industry data produced by investment firm Needham & Co., the nearly $2 billion in revenue from the sale of digital music in the U.S. last year wasn’t nearly enough to compensate for a $9 billion decline in physical music sales since 1999. Ten years after Napster’s debut, the music industry’s recorded revenue in the U.S. had been reduced by half.

Who cares? Video industry participants should.

“The biggest market cap reason that music matters is because it is the canary in the coal mine for TV and film content’s transition to the Internet,” wrote Needham managing director Laura Martin in a recent analysis. “The lessons from the music industry’s transition provide a cautionary tale for others trying to monetize their content over digital platforms.”

So far, the video industry appears to be taking the lesson seriously, as various players work to protect underlying business models. Authentication approaches that demand proof of identity before users can get to their subscription video content online are among prominent examples. Yet still, every day millions of users continue to appropriate video content from illicit file-sharing networks that deliver instant access to popular programs. Devising a commercially viable alternative to these rogue vehicles is the critical mandate for the video industry. Otherwise, it’s going to end up singing an all-too-familiar tune.

stewart@stewartschley.com

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