• by Diane Mermigas , January 16, 2008

The growth of online video is intensifying in the long shadow of recorded music's hard-learned lessons about how not to transition into an age of digital interactivity. The extent to which digital video is destined to repeat or avoid recorded music's mistakes is unclear.

If the latest developments are any indication, there is plenty of room for both.

Recently, some music industry players capitulated to consumer access free of fees and digital rights management in a bid to halt sliding sales. Artists are striking independent deals to take their concerts, recorded music, merchandising and endorsements directly to consumers. Madonna ditched Warner Music to join concert promoter Live Nation. Britain's Radiohead dumped EMI to release an album on the Internet.

Such transforming business models are beginning to materialize in online video, where the financial stakes are even higher and the situation is intensified by the writers' strike. The slow build of new digital video revenues falling way short of rapid declines in traditional video revenues seems a mirror reflection of music's fiscal squeeze.

The beleaguered music industry's plight this decade has been shaped by many of the same circumstances now enveloping online video: shifts in devices and platforms that deliver content. Once the exclusive product of radios, phonograph players and jukeboxes, music now is everywhere: mobile phones, personal data managers, MP3 players, PCs and video-game consoles. Pop-culture hits like "American Idol" have repositioned music as a critical adjunct to many other entertainment forms. The budding artists and music scores made famous by prime-time TV are rapidly growing into a new cottage industry online. But the revenues generated by digital are not enough to offset the losses from traditional "physical" recorded music.

Digital sales were up 45%, and album sales down 15%, in 2007. Digital downloads are growing more slowly than expected, and file-sharing is running rampant. Recorded music is fighting for survival. Still, it is one of the more perplexing paradoxes of these new digital times. Music is arguably the most universal of entertainment content. After all, music is tailor-made for portable interactivity, social networks and other Internet conventions.

Apple's ecosystem, which has jump-started music's digital makeover with iPods and iPhones, did not deliver any new panacea for the ailing industry at Tuesday's annual MacWorld conference. However, online music and movies now can be downloaded directly through the new iTunes rental service to an iPod or iPhone by way of an Apple TV-connected TV.

So it appears the music industry's identity crisis has been simply reduced to what consumers want, the way they want it. And that will surely be the case for online video. For the past six months that CD sales have plummeted, the music industry has been trying to get out from underneath Apple iTunes' paid downloads by shifting to digital deals on social networking sites that provide ad-supported streaming music free. Another notable alternative is Universal's pact to supply Nokia with downloadable music to phones and PCs. Universal receives a share of revenues from the sale of each "Comes with Music" phone in this new business model.

It is one of many ways the music's big four--Universal, EMI, Sony/BMG and Warner Music--are struggling to find ways around illegal file-sharing and DRM protection, which was trashed by Apple CEO Steve Jobs and resisted by major retailers, such as Amazon and Wal-Mart. It may be the ultimate irony that rival Amazon has contributed most to the DRM demise by forgoing such restrictions for its new online music service. Watermarking, the next big thing, may not be adopted fast enough to deter rampant music piracy.

The music giants might be able to get a profitable handle on all this if they could just get their own houses in order. The new private-equity owners of EMI have ordered nearly $400 million in cost cuts that include eliminating one-third of the company's employees. The shares of debt-burdened Warner Music have dipped nearly 100% below its 2005 IPO price. Digital music has not been a panacea for anyone. The digital music sales that will more than double to $5.4 billion in 2010, as well as the overall $9 billion in recorded music spending coming from physical, online and mobile outlets, will fall far short of the record $15 billion in industry sales in 1999.

It is not difficult to imagine that the media players heavily vesting in online video and film will be wrestling with similar digital issues in the near future. It's surely no coincidence that new prime-time series as well as all recording artists have an 80%-plus failure rate. New economics and business models are long overdue. The new brokering ground for music--and video--are the social-networking, file-sharing sites like Facebook, MySpace and even Yahoo's recently announced prototype communications hub. In hindsight, that would have made MTV and MySpace a match made in heaven. But as music's slogging giants can attest, hindsight is a wonderful thing.