Apple's iTunes changes may show digital rights management's a loser

Apple's new tune. The Apple faithful missed Steve Jobs at last week's MacWorld trade show in San Francisco. There was also a dearth of significant news from the company. Apple did unveil three changes to its iTunes online music store: a wider range of prices, from 69 cents to $1.29 per song; no more digital rights management restrictions; and the ability for iPhone users to purchase songs when they're using a 3G wireless network. (Buying songs used to require a WiFi link.) Yankee Group analyst Carl Howe reacted.

With iTunes commanding the vast majority of digital songs sold to date - more than six billion songs in six years - this change is a big deal for two reasons: It now paints DRM as a losing music strategy. With the vast majority of music now available without DRM, media companies thinking that DRM is their path to higher sales and less sharing of music will have an uphill battle. DRM-focused music subscription services like Rhapsody and Napster now really need to think hard about their future, and video media companies will now have an example of how their business may play out in future years as well.

Apple has added another impulse-powered commerce stream to the iPhone. By requiring customers to buy all-you-can-eat data plans for iPhones, Apple can freely sell iPhone customers everything from new applications to music over the air, without requiring the consumer to wait until they can connect their phone up to their computer. That means more impulse buys, more spontaneous use, and more Apple revenue.

The downside? iPhone-offering carriers who have their own music stores and sell tracks for $2.99 can probably write off those efforts for the iPhone-toting consumer.
blogs.yankeegroup.com

The complete ecosystem. Tech companies are increasingly hoping to sell not just hardware but content and other services to generate recurring revenues. Another Yankee Group analyst, Joshua Martin, blogged about consumer electronics companies' quest to create the perfect combination of hardware, software, services, and content. He was at the annual Consumer Electronics Show in Las Vegas.

Locking consumers into a branded ecosystem has been a major obstacle for CE companies and service providers not named after a certain red (or green) fruit. A consumer may have a Sony Playstation 3, but it is not necessarily connected to a Sony Bravia HDTV. Others may call Verizon Fios their pay TV provider, but not their preferred wireless carrier. The list of companies could be repeated ad infinitum.

Now, some may wonder as to what the benefits of locking a consumer into an ecosystem are. Is it worth the challenge? The short answer is yes. A locked-in consumer means a recurring revenue stream for multiple device purchases, easy/enhanced interoperability between devices, and the ability to introduce new business models because the more you know about a consumer the more value you can offer them.

Cisco announced plans for digital home audio devices which will offer a consistent experience amongst a number of devices/units. This consistency is core to Cisco's ability to compete in the connected home and could come into play for their routers at some point. Now, there are certainly reasons for pause: the price of the device is high, Cisco doesn't have wide brand recognition amongst consumers, and the market they are entering is niche. But if Cisco can, in fact, follow through on their promise of consistent [user interface], they could redefine the successful ecosystem.
blogs.yankeegroup.com

VCs on the streets? Could the troubled economy affect the job security of venture capitalists, who traditionally have felt fairly insulated from the ups and downs their portfolio companies endure? Furqan Nazeeri, founder of Arlington-based Virid.us, considered the possibility, and speculated about its impact for entrepreneurs.

It's not so far-fetched . . . that layoffs will soon be coming to venture capital. We're already starting to see layoffs at the large private equity funds where Blackstone, Carlyle and American Capital announced staff cuts between 7 percent and 19 percent in December. A survey of 400 venture capitalists found that 60 percent predicted a drop greater than 10 percent in 2009 venture funding. The take-away here is expect to see cuts of at least 10 percent in 2009. Those first to be cut will be the associates and principals at the larger funds, but expect to see some partners leaving as well.

What does this mean for entrepreneurs and is there anything you should be doing to prepare?

The worst situation is if you have a partner on your board and that person leaves the fund and is replaced by an associate or principal. That means your board member (i.e. your advocate within the fund) will have a hard time supporting you (heck, they won't even be invited to the partner's meeting where funding decisions are made).

The other, more proactive, thing you can do is to develop relationships with other partners at the fund (other than the one who sits on your board). My own experience was that I would meet with partners other than my own usually just once per year, which is what will happen if you're not proactive. Having relationships with more than one partner will help you have a "plan B" in case your current partner leaves but it'll also help you in other ways (like being more of a known quantity when discussions about funding come up). People are always kinder to someone they know, [rather] than just names on paper.
altgate.com

Have you seen an interesting local business blog item lately? E-mail kirsner@pobox.com.