In the last 24hrs, I’ve read a lot of analysis across the spectrum and heard the thoughts of friends in various segments of the music industry. Here are some of the big issues that are front of my mind.

Whither the MP3 of streaming music?

Most of the people I respect in online music have been opining for on-demand streaming music for years. So, their first reaction has echoed that of my friend Lucas: music in the cloud will now be a reality. But *how* it will become a reality matters too, and I think that’s been lost a bit in the discussion so far.

In the download world, an open format (MP3) pre-dated Apple’s entry. So, they had no choice but to support it in order to make their software and devices backwards compatible. In fact, it’s easy to forget today that the market for iTunes and the iPod was largely built around satisfying the needs of consumers of illegally acquired music (the iTunes Music Store was actually launched over 2 years after iTunes debuted). If not for that pre-existing market condition, I don’t think it’s hard to believe the iPod would only play AAC music files (Apple’s proprietary format). Remember that no one could compete with the iTunes Music Store as a legitimate storefront for online music until less than two years ago, when the labels agreed to let Amazon and others sell in MP3 format so that customers could play the songs sold by retailers other than Apple on iPods. (This in itself was an interesting saga with Jobs publicly justifying why Apple would never support someone else’s proprietary format on their software/devices and why they would never license Apple’s DRM to others. In the end, the labels’ fear of Apple’s growing control of the online music value chain was greater than their fear of piracy and they called Jobs’s bluff by actually licensing MP3 sales.)

The relevance here is that there is no MP3 equivalent for streaming music — no pre-existing open standard that consumers will require Apple to support before they buy a wifi-enabled iPod (aka iPod Touch). Just like there is no (legitimate) way to play films or tv shows not downloaded from the iTunes Store on your Apple TV, there will be no way to consume on-demand streaming music from other sources in the native player on your iPod. You will of course continue to be able to install separate third-party applications, like Pandora or Spotify, to manage and play streaming music you acquire through those services. But, that silo will continue to be incompatible with iTunes and the rest of your music library while the native player will offer you an integrated consumption experience across downloaded and streaming music. Maybe this will still be good enough for the small number of power-users who care enough to want an alternative to the Apple offering (like those of us today who install the eMusic or Amazon download manager to have a somewhat equivalent purchase alternative to the iTunes Music Store).

However the segment for whom I think the lack of an open streaming music standard is potentially most harmful is the actual artists and the growing industry of direct-to-fan enablers, including my good friends at Topspin. Direct-to-fan sales are better for the artist because they get to own the customer relationship with the people who are *their* fans to begin with (see my boy Ian explaining to Wired how important this is) and they can have more control of the offering and better margins by cutting out middle-men like Apple. Today, I can buy an album directly from Topspin artists like Get Busy Committee or Fitz & The Tantrums (two of my current faves) in MP3 format and play it in iTunes and on my iPod. How exactly are they going to sell me streaming music outside of iTunes (or a 3rd-party service)? There are products like MobileRoadie, which artists can use to create their own branded iPhone/iPod app. But, I don’t foresee consumers being willing to switch apps every time they want to hear a new artist (and forget about a streaming playlist with multiple artists).

Licenses, schmicenses!

Several commentators on the Lala deal have noted that their licenses with the labels expire in the case of an acquisition. And I hear from insiders that Apple has already had requests for streaming licenses denied by at least some labels. Here’s why neither of those things matter.

Apple is going to build a kick-ass streaming experience natively integrated into their service/software/device stack of the iTunes Music Store, iTunes, and the iPod. They are going to get the thousands of independent labels, aggregators like TuneCore who represent individual artists, and at least one or two major labels (my bet is EMI will be first) to give them streaming licenses on a critical mass of music. Then, they are going to use the iTunes Music Store to promote the shit out of both downloads and streaming (most likely bundled) from the artists for whom they have streaming licenses while at the same time freezing out promotions for any hold-outs.

This is a non-issue IMHO and every song you can buy as a download from the iTunes Music Store today will be available for streaming within a year of launch (just ask NBC how well playing chicken with Apple works).

Sustaining innovation doesn’t work.

This post is already way longer than I intended, so I’ll leave this point as more of a footnote. On-demand streaming music is the future. Everyone I respect believes it, Apple believes it, it is the logical conclusion of the path the music consumer experience has been on since Napster. And yet it is a business widely viewed as “toxic” by investors, several of whom in recent months have demonstrated they think so little of its future potential that they are willing to take steep losses on their investments to get out. What gives?

Not only were these businesses endorsed by the major labels, both iMeem and Lala actually had labels as investors (as does Spotify). The reason that on-demand streaming music is a great product but shitty business is because the license fees demanded by the labels make it impossible to make money with any kind of offering that consumers will think is reasonable. It’s somewhat counter-intuitive that a vendor who is an investor wouldn’t be willing to adjust their pricing in order to preserve the value of their investment. But Warner Records, in particular, made it clear that are happy to spend tens of millions of dollars co-opting companies they see as potential threats and running them out of business in order to prevent hundreds of millions of dollars in (perceived) cannibalization.

This is Clayton Christensen 101:

By only pursuing ‘sustaining innovations’ that perpetuate what has historically helped them succeed, companies unwittingly open the door to ‘disruptive innovations’.

In other words, by trying to take an innovation and use it only to perpetuate and/or protect legacy business models, incumbents give new entrants the opportunity to do things the way the market actually wants them to be done regardless of how they have been done in the past. By trying to force LaLa from being a potentially disruptive innovation into a sustaining innovation, Warner Music and the other major labels unintentionally drove them into the arms of Apple, still the biggest threat to the legacy model the labels are trying to preserve. (Studios and networks trying to “de-fang” Hulu, take note.)

First of all, yes people, this blog is not (entirely) dead. I’ve been a bit busy with stuff over the last few months. In many ways, Flickr and Twitter have replaced this blog for cataloging my random acts of self-expression. And while there were a few subjects I felt worthy of real blog posts in that time, and I even started writing up a couple of them, I just haven’t had the time (or, more accurately, the attention span) to see any of them to completion. But today, I found myself writing a blog post sized comment on my friend Ian’s blog for the second time in a week. So, I figured why not leverage some of that energy over here. So, here goes…

Right now it seems that everyone is talking about Apple, and you can’t talk about Apple without talking about Steve Jobs. As a student of business and management, I find Apple since the return of Steve Jobs to be an extremely interesting case study which I’ve followed very closely. And for someone who’s never worked there, I think I’ve been able to glean some relatively deep insights into the company:

• I’ve been an avid Apple customer for the last 17 years, giving me a solid grasp of the history of their consumer product efforts
• The product I work on was originally Mac-only and is now competitive with features in OSX, so I know what it’s like to be an Apple ISV and competitor
• I work with a number of hardcore Apple fan boys (and one ex-employee/fan boy) — no less than 5 members of our team waited in line for the iPhone — so I get to observe first-hand the impact of Apple-mania even though I’m no longer as personally passionate about the company as I once was
• I’ve been able to attend the last 4 Stevenotes (2 MacWorlds, AppleTV special event, and this week’s iPod Touch special event) thanks to another Apple fan boy for whom I work, so I’ve experienced full power and glory of the Cult of Steve.

A little over 2 years ago, I sold the 200 shares of Apple stock I bought back when Jobs returned to be CEO. At $41/share, I made a tidy profit and an $18,000 mistake based on yesterday’s closing price (or, more depressingly, $21,672.35 based on the 52-week high). Why did I sell? Simple, I underestimated Steve Jobs.

I originally invested in Apple because I felt it was undervalued based on the assets that were in plain sight. Contrary to people who thought Apple was on its last legs and about to be steamrolled by the cheaper WinTel ecosystem, I believed strongly that the innovation and quality Steve Jobs brought to computers insured that Apple would lead the growing high-end segment of the home PC market and would be profitable doing so. When the stock started surging on the hype of the iPod, I sold because I felt the market was placing too much value on a non-core product line with unsustainable growth. Boy, was I wrong!

In reflecting on what I thought at the time based on observable facts and what has been subsequently revealed, one thing became self-evident: there’s always more to Steve Jobs than meets the eye. What he let’s you see about what he’s thinking and doing is what he wants you to see. Jobs has so deftly controlled his own image over the last 9 years that he has brought even the most intelligent observers to the point of tin-foil hat wearing conspiracy theorists. No man is infallible, but if appearance is reality, then Steve Jobs may be the world’s most perfect human. He has us all thinking that even things that appear to be mistakes are finely calculated maneuvers that we’re only meant to think were mistakes — every marketing misstep or accidental leak is actually by design in furtherance of the Jobs master plan. Somewhere between a smart guy, who’s really good at PR and more than a little bit lucky, and some superhuman demigod, who has already calculated every possible move on the board a decade out and is sitting there saying to the entertainment industry and to Microsoft and to the telcos “‘mate in 437″, lies the real truth about Steve Jobs. But it is a truth we will likely never know (and one could hypothesize that Jobs’ own pathology is such that he doesn’t know the real truth himself).

And so predicting what is next for Apple is really a game of picking a number on the range of Steve Jobs’ potential IQ. When I bet against the iPod, I was betting Steve was a talented product visionary but an average business man. I looked at the price point of the iPod and Apple’s historical inability to crack the mainstream (a problem that also afflicted Jobs’ intervening venture, NeXT) and said to myself that the growth curve in which Wall Street was putting so much value was bound to flatten as the high-end early adopter market became saturated (ironically, I realize I repeated this mistake only 2 months ago in dismissing the mainstream impact of the $500 iPhone). I also made the mistake of looking at the iPod and iTunes for what they were at the time and not what they could and would become. I didn’t put much faith in Steve Jobs’ ability to successfully negotiate Hollywood into enabling true consumer-grade digital media experiences. I strongly believe Jobs’ maneuvering of the entertainment industry will go down as one of the most brilliant feats of business acumen in our time and will ultimately be his most meaningful and enduring legacy — after decades of everyone from Sony to AOL to Microsoft trying and failing with tremendous displays of money and power to displace the preeminence with consumers that labels and studios had secured through their stranglehold on content, Jobs comes out of nowhere to do it with little more than elegance and cunning (oh and by the way, he now basically owns Disney — the flagship brand of the entertainment industry).

Suffice it to say, I will never underestimate Mr. Jobs ever again. I may end up overcompensating by giving him too much credit in this and future analyses. But for right now, I’m just going to think of what I think the smartest person in the world would do (to the extent I’m capable) and bet that Steve Jobs has *at least* thought of that. If nothing else, it’s a pretty stimulating thought exercise, which is why I think so many smart people find themselves drawn to speculate on Apple’s strategy.

Ian and I are both pretty hard-core Clayton Christensen acolytes, and Apple provides the closest thing to a living laboratory for testing his theories (Apple’s lost early lead in the PC market is also one of the quintessential examples in The Innovator’s Solution). As I’ve written before, one of the basic principles of Christensen’s theory is that the basis of competition in any market is not static and changes based on how effectively customers’ needs are being met. At those inflection points — when multiple firms in the market are providing customers ‘good enough’ solutions to the problems they care about — the nature of the problems that customers care about start to change, which opens the door to disruptive competition. In a pre-’good enough’ world, the integrated end-to-end solution (i.e. Apple’s approach) is superior. But after that particular problem has been solved satisfactorily by several competitors, continued focus on the superior solution for that problem has diminishing marginal returns and is often a hindrance to shifting focus to go after the new problem(s) about which customers care.

One could look at Apple’s integrated solution DNA and history in the PC market and say that it is bound to suffer the same fate in digital media, which is arguably the company’s new core business and why it’s no longer called Apple *Computer*. In the post that sparked this rant, Ian espouses just this theory (i.e. that the iTMS monopoly on the iPod will inevitably be replaced by an ecosystem of compatible music services). The substance of my long-ass comment was basically, “you’re dangerously underestimating the Jobs-ter.” A point which Ian subsequently concedes. Since I’m assuming Steve Jobs is smart enough to at least think of whatever ideas I can and since I wouldn’t run my iPod/iTunes money train head-long into a black-hole of Christensenian physics, I think Apple is looking to do the one thing a company can do to fight disruptive innovation — disrupt themselves.

If your strength (and arguably religion) as an individual is in the end-to-end user experience and you have a company set-up to execute on an integrated solution strategy, how do you keep from ultimately being undercut by competitors taking the modular/ecosystem approach? Simple, never let the market reach the ‘good enough’ point. I believe Steve Jobs plans to leverage Apple’s leadership (more like ownership) of the digital media space to drive consumer expectations in a new direction that only Apple can deliver for the foreseeable future. It’s basically resetting the clock on competition — while Microsoft and Sony and everyone else thought they were catching up in digital media, Apple has been busy changing what the game is about. By the time the competition has come up with a viable iPod/iTunes competitor, consumers won’t care because they’re too busy caring about that new thing Steve Jobs just unveiled. And the game of catch-up will begin again.

If you believe all of that, then the question becomes what is that new thing going to be? Assuming it’s going to be built on something we’ve already glimpsed in some form (which is not necessarily a safe assumption, but let’s go with it), there are two potential directions: AppleTV and the iPhone. I believe both will evolve, just as the iPod did, from being somewhat tangential offshoots of a core product line to being their own core product lines. AppleTV will grow over time to be an important force in the digital living room war that has been simmering for nearly 2 decades now and is ready to become full-fledged sooner than we might think, especially now that Apple’s in the game (remember how long digital music was around pre-iPod). However, I see that as a pretty direct extension of Apple’s digital media strategy, which is interesting but well-worn territory. What’s more interesting to me right now are the implications of the iPhone.

The launch of the iPod Touch proves that the iPhone is about more than a wide-screen iPod or a mobile Internet device. Everyone kinda writes off the phone part of the iPhone, but it’s the only compelling reason I can think of for Jobs to create an inferior product (for the same price as the iPhone, the iPod Touch delivers 2x storage and WiFi in a smaller package with all the same features except a cellular radio, a (not-so-great) camera, and bluetooth) and encumber himself with burdensome telco partnerships (not only are they a pain in the ass to deal with in general, but they’re probably dictating terms on the iPod Touch, like no bluetooth). I think Jobs is looking to do to the telcos exactly what he did to the labels and is trying to do to the networks and studios. AT&T thinks they got a great deal by being the exclusive launch partner for the iPhone, but that was just Steve dangling some short-term candy in front of them so they wouldn’t realize that he’s slowly coming up behind them with a knife. What exactly it is that he’s after isn’t entirely clear to me yet. But, it’s gotta be communications oriented. Since the days of cellular voice are numbered and I don’t think Apple wants to own the network, my hunch is that his play is for the address book (for these purposes, I see calendar as an extension of address book — they’re both views into the people with whom you interact). The most valuable (and thus complete and current) electronic address book that mainstream users have is on their mobile phones. And once they’re syncing those mobile phones to iTunes in order to manage their digital media, then Apple has their address book/calendar as well. What does Steve have in mind for unlocking the value of all that personal information now in his control? Social-enabled iTunes? iChat and Mac Mail for Windows? Some form of .Mac social network? Whatever it is, I guarantee the telcos (and whoever else will be threatened by this move) won’t realize it until it’s way too late.

So, have I given Mr. Jobs too much credit? Who knows? All I do know is that I had fun doing it. Dreaming up the most awesome business strategy possible unencumbered by convention is rarely more than an intellectual exercise, except in the case of Steve Jobs’ Apple. No wonder the man is so revered that he not only has an impersonator but the impersonator is unbelievably popular too. Despite everything above, I’m not entirely a starry-eyed Steve Jobs worshiper. In fact, I think the two biggest potential weak points in Apple’s seemingly impenetrable armor are directly attributable to the downsides of the personality traits that make Steve Jobs such a business virtuoso.

Even if he doesn’t (appear to) make mistakes, Steve Jobs is a human being and has human passions. His passion and humanity are probably his greatest assets in his role as product visionary. The extent of his ability to put himself in the shoes of the user, despite being far from the typical consumer, is something that is unparalleled in any CEO I can think of. This self-awareness and empathy, albeit in a clinical form, is at the heart of Apple’s ability to time and again lead consumers where even they had no idea they wanted to go. However, the essence of the human condition is that our passions are a double-edged sword that can supersede reason for both good and bad. Steve Jobs’ ego and temper are no secret, and his great success may be directly attributable to these passions (one of the most insightful commentaries on his personality I have seen states: “most of his business moves are still in reaction to having been fired by Apple back in 1985″). But they may also prove the most likely source of a true misstep by Jobs (past ego-driven foibles are well chronicled, but Steve’s always come out on top) and thus Apple, either at the hands of a savvy opponent or, more likely, a lack of self-restraint.

The other potential liability I have seen is likely also the flip-side of one of Jobs’ great strengths: his uncanny and supremely self-assured sense of taste. Social software has been one of the few areas of recent consumer technology innovation in which Apple has not played any role. When I heard Jobs speak about iLife at MacWorld 2006, I realized that Apple got media creation (iLife, Aperture, ProTools, FinalCut) and they got media consumption (iTunes, iPod, AppleTV), but they were totally missing the boat on media discovery/attention management. They’re now starting to add more social features to iTMS (like the My iTunes widget), and I speculate above that the iPhone is the first salvo in a social software offensive for Apple. But it’s clearly something that has not been in Jobs’ or Apple’s DNA to date, which is particularly notable given the enormous attention that social software has been receiving across the consumer technology industry. My personal opinion on why is because Steve Jobs has no problem knowing what he likes and can’t imagine why he’d ever need someone else’s help in figuring that out. And so the true value of powerful recommendations and other social attention management functionality in his digital media experiences eludes him for now. But, this is a man capable of unbelievable personal growth and who obviously believes “foolish consistency is the hobgoblin of little minds.” So, I wouldn’t be surprised if this potential weakness becomes a source of great strength — just as Jobs’ need to disprove his ‘cool, but not mainstream’ reputation resulted in the iPod, one of the most wildly successful global marketing campaigns of all time.