In 1999, the music industry was coming off a record year.  The compact disc and pervasiveness of CD players promised years of strong profits and high margins for the recording industry.  Then, in the waning months of 1999, a Northeastern student named Shawn Fanning developed a simple file-sharing program that would erode record company profits into the foreseeable future.  

How did Napster, Rhapsody, and iTunes cause industry sales to drop from $14.6 billion in 1999 to $6.3 billion in 2009?  

There was an inherent inefficiency in the CD market.  Consumers would purchase a CD for $15-$20, and for that purchase they would receive 10-15 songs.  Beyond two or three hits songs, most of the music on the CD was of low quality and did not get much play from consumers.  Music aficionados were essentially paying $4-$5 per hit song on a CD.  The ability to either download songs for free or purchase individual songs for $0.99 created a ‘singles market’ in music.  It was no longer acceptable to drop a couple of hits and fill out the track with filler beats.  Consumers now had the choice to choose the music they wanted to hear and ignore the noise.  Although some music listeners contend that purchasing unknown songs along with the hits allows for musical discovery and band loyalty, there are plenty of other ways to discover a song (samples, YouTube videos, clips in commercials/movies/TV shows).  These industry innovations lowered the cost of attaining music, forced recording studios to raise the quality of their non-singles, and increased consumer choice.  The definition of disruption.

The cable television industry is about to undergo a similar transformation.  Currently, consumers have very little choice as to what channels they can order on cable.  They purchase the basic package, deluxe package, or premium package with special movie channels like HBO, Showtime, and Cinemax.  Cable companies brag about offering hundreds of channels to their subscribers, but has that ever mattered?  Of the hundreds of channels on cable today, I, like most of America, only watch 10-20 channels in a given month.  I spend significant amounts of time holding the ‘page-down’ button trying to track down the channels I want to watch.  Cable companies don’t earn their large profit margins on ESPN or Nickelodeon.  They boost sales by bundling rarely-watched channels like TV Guide Channel, HSN, TV Land, Tru TV, Hallmark Movie Channel, Reelz Channel, and more.  There is a demographic who watch these channels but consumers should have the choice to choose which individual channels to purchase and which to leave off.

Enter Roku, Boxee, Google TV, and Apple TV.  These platforms are still in their infancy (and cable companies are blocking these applications from streaming their content), but they are a preview of what will begin the slow, steady bleeding of cable company margins.  Just as digital music platforms have increased freedom of choice and ease of use, Internet TV platforms will change the way society digests cable TV.  Cable companies are fighting the influx of digital cable solutions by blocking access to their content, but it will only be a matter of time before a Napster-like service breaks through and provides an easy way to watch cable TV with little to no cost.

The Takeaway

If you are thinking about pursuing an idea or are in the middle of your first startup, try to establish if your concept, if executed with skill, can do one or all of the following:

1. Lower the cost of a good or service

2. Increase ease of use of a current good or service on the market

3. Provide the consumer/business with more options in the marketplace