Digital Matters - Issue 39

It's last winter, and Steve Volk is sitting at a table at Harry's, a restaurant just around the corner from the New York Stock Exchange. He's an unassuming man. He's also chairman and CEO of DataPlay Inc., a digital-media company based in Boulder, Colorado.

Before Volk's swordfish dinner arrives, he pulls out a grab bag of memory cards. One is big and clunky, has 8 MB of memory, and costs $200 to manufacture. The next one is sleeker, has less memory, and costs more to produce. On and on it goes as he makes his way through the bag.

Then Volk pulls out the DataPlay Disc. It's the size of a quarter, has 500 MB of memory, is recordable, and works across every platform imaginable. The DataPlay Disc costs roughly $5.

Volk believes that DataPlay will soon make disks that have 2 GB of memory and should cost about the same as its current disks. You'd be well advised not to bet against him. So, in a couple of years, we won't be buying CDs, diskettes, or flash-memory cards -- we'll be buying those little DataPlay memory quarters (or something smaller). Those little disks will store it all: text, digital photographs, music, voice mail. And any adapters that you might need will be built into your PDA, cell-phone, or OnStar system.

Okay, now put that technology together with peer-to-peer computing, which is all the rage in the Silicon Valley venture world these days. Peer-to-peer computing is like Napster, but without the middleman. My computer talks directly to your computer, which talks directly to someone else's computer, and so on down the line. Peer-to-peer computing enables networked computers to eliminate the need for a server. Collectively, those computers are the server.

An open-source application known as Gnuttela is a sort of poster child of peer-to-peer computing. Gnuttela allows you to link your computer tofriends'computers -- exponentially, across all six degrees of separation. Collectively, you become one another's server.

Now, add a dash of wireless-Web technology (so that you can connect to whatever server you choose, no matter where you are). Blend all of that together, and you get the end of the recording industry (and, eventually, the end of the creative-arts industry in general) as we know it. That explosion you just heard is the music business. And for some reason, as is so often the case, industry executives seem intent on pushing the detonator button themselves.

That's not a surprise. Everyone knows by now that digital technology deconstructs traditional business structures and traditional business strategies. Look at what systems like TiVo and ReplayTV do to advertising-based broadcast television. Both systems pretty much erase the advertising. And look at what eBay has done to classified advertising. Look at what Amazon.com has done to the book business. (A good book on how digital technologies deconstruct traditional business structures and strategies is Blown to Bits: How the New Economics of Information Transforms Strategy [Harvard Business School Press, 1999], by Philip Evans and Thomas S. Wurster.)

What is surprising is how the major "record" companies (and some musical artists) have decided to respond to that challenge. They sued Napster and got a federal district court to shut down the Internet company (at least temporarily; stay tuned for further developments). They've enlisted various artists and musical groups to bring their own lawsuits against Napster. They're menacing new-economy recording companies like FreedomZone.com. They're actually raising prices on new products. They would even sue the creators of Gnuttela if they could figure out how to argue the case ("Goddamn it, your honor, those people out there on the Internet are connecting to one another!"). In short, record companies and many recording artists are burying their heads very deep in the sand.

Of course, that strategy isn't going to work for long. This is not to say that companies like Sony, Virgin, and Warner will go out of business tomorrow. For the moment, their businesses are booming. The Internet is connecting them to a much wider audience than before, and people are buying more CDs than they ever have. This is known as the "media effect": Every time a new medium comes on the scene, it enhances the usage of existing media. But eventually, that string runs out. According to Don Tapscott, author of Growing Up Digital: The Rise of the Net Generation, baby boomers watched 24 hours of TV per week when they were growing up -- echo boomers watch 16 hours of TV per week. Each generation has its own media.

Over time, artists are going to figure out that digital technology enables them to connect directly with their fans, that the middleman can be cut out, and that all the work done by the middleman can be jobbed out at a much lower cost.