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Facing the (digital) music

The Internet has smashed the status quo in trading stock and redirected PC sales from retail to online; both have moved onto the Internet and cut out the middleman.
Written by ZDNet Staff, Contributor

Now, it's the music industry's turn. "What makes them big and makes them powerful is their control over distribution," said Ken Wirt, vice president of corporate marketing at Diamond Multimedia Systems Inc. "With the Internet, artists can put their music out there and anyone who likes it can buy a CD directly from you. That distribution barrier goes away. "

In the US today, Diamond will release its portable digital music player, Rio PMP300, the first device from a major hardware maker that can play music downloaded from the Internet. The Rio promises to turn the music industry on its ear and accelerate digital distribution of music, giving more power to independent bands. All this in a package smaller than a Walkman and weighing less than a Mars bar.

This has not made the five top music companies happy, said competitors. "The majors are getting upset and screaming like drag queens because they will not be the ones making the most money anymore," said independent musician Reid Paley, who has signed on with online music seller GoodNoise Corp. GoodNoise sees Internet music taking off with the release of the Rio. "The music industry will have to deal with a new channel -- yes -- but it's lower risk, higher profit and cheap, online distribution," said GoodNoise president and CEO Gene Hoffman. "It opens up a whole new channel for independent labels."

For artists, a leaner, meaner way of getting music to the user means more profits. GoodNoise offers its artists 50 percent of the profit, compared to the 10 to 15 percent usually offered by the majors. In addition, Internet distribution and its ability to avoid physical media solves one of the major plagues of the music business -- returns.

"Returns suck," said Jeff Price, president and general manager of independent label SpinART Records Inc. "That is the horrendous part of music industry." On average, 20 percent of CDs are returned, according to Price. In addition, the music middlemen all disappear. Price is familiar with the horror of trying to get an independent CD into stores. "First, you have to get the distributor excited about it and then you have to get the retailer excited. Last, you somehow have to get the customer to at least listen to the music" he said. "And don't even bring up shelf space."

Able to pare down two to three levels of middlemen results in increased profits. While CDs in stores average $15 (£9) to $20 (£12) a piece, a CD bought on the Internet starts around $12 (£7) and digital music delivered over the Internet costs $9 (£5) for the album. Furthermore, MP3 format rival Liquid Audio Inc. believes that the Internet can only help the music industry as a whole. Today, stores have small margins, about 30 percent on a typical CD. Stores on the Internet can sell more music at a lower price and still reap higher profits.

"The Internet is not an enemy of the retailer," said Bill Woods, director of marketing for Liquid Audio. "It is another way to help their brick and mortar business."

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