Delivering the (Digital) Goods or

Delivering the (Digital) Goodsor

Jim NobleWarner Music Group

The Canary in the Coal Mine

C Warner Music Group

C Warner Music Group

C Warner Music Group

“There is nothing more powerful than an idea who’s

time has come”Victor Hugo

C Warner Music Group

“Being ahead of your time is as bad as being behind the times”

Guglielmo MarconiRadio - 1901

John Logie-BairdTV - 1925

Tim Berners-LeeWWW - 1992

Thomas EdisonElec Light - 1907

C Warner Music Group

Dot Coms and Making Money

“The wild fling between a young & promising technology and impetuous financial markets is ending in an acrimonious separation. The

only outstanding question: what can be salvaged from the break up?”

Financial Times, October 13, 2000

C Warner Music Group

$2.3B$6.1B

$18.9B

($0.8)B ($1.7)B

($9.9)B-15

-10

-5

0

5

10

15

20

December-1997 December-1998 December-1999

SalesNet Income

Source: Mercer Management Consulting

10 Leading Internet Companies’ Financial Results(excluding Cisco and AOL)

(36%) (28%) (52%)Losses as a% of sales:

($ billion)

Business on the Internet

C Warner Music Group

($7.4)

($3.5)

($0.6)

1.9

5.4

2.8

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

$8

1998 1999E 2000P

Ad RevenueAd Spend

Source: Mercer Management Consulting; Competitive Media Research; Internet Advertising Bureau; Advertising Age; Forrester

Advertising Balance of Trade($ Billion)

Business on the Internet

C Warner Music Group

However…….The rebound is coming soon

as the Internet matures from metadata to product

C Warner Music Group

0.1 0.2 0.30.9

3.2

5.0

8.0

13.0

1.7

0.00

2

4

6

8

10

12

14

1992 1994 1996 1997 1998 1999 2000E 2001E 2002E 2003E

Source: Cyber Atlas; IDC; Industry Standard

Pages on the World Wide Web(Billion)

Exponential curves are most interesting at the “knee”

MOORE’S LAW

C Warner Music GroupExponential curves are most interesting at the “knee”

MOORE’S LAW

1990 1995 2000 2005

C Warner Music Group

Technology Drivers

1) Compression

2) Broadband

3) Internet peer-to-peer file sharing

4) Wireless

C Warner Music Group

1) Compression

Sony ATRAC 1 ADPCM / FFT Motion Picture Experts Group 1, Layer 3 MP3 DTS Sony ATRAC 3 Dolby AAC Real Networks RealAudio Microsoft Windows Media Technology 4.0 MPEG 2, 4, 7 ..etc.

5:1

400:1

For audio / video:in real time

1984

2000

C Warner Music Group

0

0

0

0

0

1

1

1

14.4 28.8 56 128 384 1.54 4 10 44.7 100 1000

37 Min

19 Min

4 Min1 Min 20

sec8

sec3

sec1

sec<1sec

2) Broadband

Broadband

Kbps

10 Min

<1sec

Narrowband

Time for Typical MP3 File Transfer (~4 Mb)

300 - 1965; 14.4k - 1985; 56k - 1995

C Warner Music Group

0

0

0

0

0

1

1

1

14.4 28.8 56 128 384 1.54 4 10 44.7 100 1000

37 Min

19 Min

4 Min1 Min 20

sec8

sec3

sec1

sec<1sec

Broadband

Kbps Mbps

10 Min

<1sec

Narrowband

Time for Typical MP3 File Transfer (~4 Mb)2) Broadband

300 - 1965; 14.4k - 1985; 56k - 1995; DSL - 2000; T1 - 2000; Cable - 2001; OC - 2005

C Warner Music Group

0%

20%

40%

60%

80%

100%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Goldman Sachs (11/15/1999)

Narrowband Households

Broadband Households

U.S. Broadband Adoption(% Total)

2) Broadband

C Warner Music Group

3) File SharingMP3.com: Centralized Model

User

User

User

User

User

User

Source: Deliotte & Touche

C Warner Music Group

Central Registry

3) File SharingNapster: Decentralized Model

User

User

User

User

User

User

Source: Deliotte & Touche

C Warner Music Group

3) File SharingGnutella: Peer-to-Peer Model

User

User

User

User

User

User

GGGG

GGGG

GGGG

GGGG

GGGG

GGGG

Source: Deliotte & Touche

C Warner Music Group

3) Emerging P2PAIMSTER3.3 million Packages delivered by Federal Express

224 million Bulk rate letters delivered by the USPS

280 million Phone calls on the AT&T network

851 million AOL instant messages

2.1 billion Personal e-mail messages sent in the U.S.(average daily rate in January 2000)

FLYCODEFrom the creators of Napster

Legal file sharing, with Rights & Payments

C Warner Music Group

4) Wireless (with XML)

Cellphones with microbrowsers PDAs (Omnisky, BlackBerry…) Airports Spaceway (GM Hughes)

Teledesic (Microsoft)

etc….

Internet in the Sky

C Warner Music Group

A) 1/2 million

B) 3 million

C) 7 million

D) 12 million

How many users will access the Internet worldwide via devices

other than a PC this year?

4) Wireless (with XML)

C Warner Music Group

551691

779 794951

234

549

910

333

87

22

7

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2001 2002 2003 2004 2005

Wireless Internet Subscribers

Non-Internet Wireless Subscribers

Source: Industry Standard (May 22, 2000)

Global Wireless Market(Millions)

C Warner Music Group

Digital SourceAvailable?

Easily Uploaded/Downloaded?

Easy forConsumer?

Music

Books

Television

Movies

The Canary in the Mine

C Warner Music Group

Delivering Digital Goods

PRODUCT

META DATA

RIGHTS

COMPRESS ENCRYPT CONTAINER

CONTROLS

TRANSMIT

UNWRAPDECRYPTDECOMPPAYMENT

C Warner Music Group

Music Channels to Market

Source: Goldman Sachs 11/15/1999; Forrester Research

0

2

4

6

8

10

12

14

16

18

91 92 93 94 95 96 97 98 99 00 01 02 03

U.S. Music Industry Sales($Billion)

Online Sales 41%

59%Retail Outlet

Sales

C Warner Music Group

Digital Downloads

0

2

4

6

8

10

12

14

16

18

91 92 93 94 95 96 97 98 99 00 01 02 03

Source: Goldman Sachs 11/15/1999; Forrester Research

Online Sales

Retail Outlet Sales

THE INTERNET IS NOT A ZERO SUM GAME

C Warner Music Group

Strategy to Compete

This has extraordinary implications for Information Systems

C Warner Music Group

Lessons Learned Internal I.T. must become expert on Internet

service providers (not just ISPs and ASPs, but DAM, DRM, DGM….)

If you don’t get it, the business will outsource I.T. by the back door

The CIO must be seamless with the CTO

Music has one year to get it right - how long do you have?