Is the cost of distribution really nearing zero?

This is what I hear. I read it in Chris Anderson's book The Long Tail. I also hear that it's the aggregators and online retailers that will benefit from the fruits of the long tail rather than each single artist.
If that is so....then why is SonyConnect going out of business?
http://www.dmwmedia.com/news/2007/06/18/sony-to-shutter-connect-digital-music-and-video-store
It's true that SonyConnect only does a fraction of the business of iTunes and is probably considered a distant 5th or 6th if you were to rank the digital stores. But if distribution is cheap, and if the digital sector is planning to grow, then it would only makes sense if the SonyConnect store stays open . If digital distribution means low costs, that would mean a company could employ a minimum number of employees for which a minimal gross income could support. I am not sure what SonyConnect's sales were, but there would have to had been enough business to support a skeletal crew (brand name of Sony, with practically the same inventory as their competition, with some many exclusives that included direct downloads of the performances from Jimmy Kimmel's show.)

So what went wrong? Did Sony make the corporate mistake of overstaffing and over-forecasting?
Or do the teachings of the Long Tail underestimate the true costs of digital distribution?

I think I can make an argument for the latter. When the costs of distribution are discussed, especially when comparing to their retail counterpart, things like shelf costs, storage, delivery, returns, etc are discussed. What is rarely discussed is the administrative costs involved. Let's take accounting for example.

Imagine if you were a start up retail distributor 10 years ago. You established deals with 100 record labels. At an average 10 albums each, your company is distributing approx. 1000 albums to retail outlets nationwide. If business does well, you might think about hiring an accountant or two. So at first you let the accountant know he/she has 100 clients and will need to report and request quarterly disbursements on over 1000 items.

As your business switches from an album oriented market to a singles market, you announce to your accounting department that every album will also be sold as individual singles so customers can buy particular songs (maybe , in a physical retail example, you have an inhouse CD duplication department that produces these disks). So now instead of keeping track of 1000 different items, you are keeping track of the incoming sales about 10,000 different items.

Now, lets say that the Long Tail craze happened a few years earlier, back when physical retail was still hot. You adopt this philosophy and inform your accounting department that your company will be distributing far beyond established labels and that anyone, even some guy who plays every Monday at some coffee shop to 10 people, can sign up to have their CD distributed by your company. So instead of 100 labels…you have 1000 labels and indie artists without a label and about 20000 items to track. In addition, you will be assisting established labels to digitize their back catalog so they can be pressed and sold on CD, thus increasing your inventory by another ten fold. Do you think your accounting departmentt may grow? Maybe hire a few more accountants? If so, then your costs of distribution have increased.

Now, fast forward to the days of digital distribution (either by aggregation or  online retail) . You take away all the physical products and you will lose a lot of staffing (stockroom and shipping departments would be deleted). However, the accounting structure still stays the same and staffing would indeed increase (example: working in a educational fundraising environment, I have seen our accounting department grow as more scholarships and initiatives were created). And although accounting software has improved so much over the years, you still need people to run it, report on it, and facilitate quality customer service to your clients. So, in that aspect, the cost of distribution is NOT close to zero.

Now, I will admit that I have never worked for a music distributor of any kind so maybe I am wrong about the organizational chart of either physical retail or digital. But one thing I do know is that one of the most recent players on the new digital scene - SnoCap/Myspace -  has made a bold statement by charging 45 cents per song for their combined services. If you are selling each song for 99 cents, that comes up to be about 45%. Quite a bit chunk to pay for a service that doesn't have to pay to store your music and ship it (I am hearing that storage space on a server is getting cheaper and cheaper).

And I am certain that accounting is not the only thing that expands in the long tail environment. How about an aggregators/store's promotional department. If webspace is unlimited (unlike the limited number of pages in a brochure or limited ad space in a magazine) than the opportunity to promote (highlight/feature) more of the music you are selling becomes greater. More labels and artists can be included. Placement within these webpages can still be sold as a premium, but the more opportunity to feature one of the artists you are selling, the more people you need to staff to handle these promotional tie-ins (when a magazine increases from 70 pages to 120 pages, thus increasing ad space , doesn't the company's advertisement department increase as well?). The ironic thing about this is that the long tail supports this. When a small record store can only carry 2500 titles, they will feature about 50 of them in front racks and listening posts. Maybe much of the placement is paid for by labels, but regardless the small amount featured and placed can be considered the head while the thousands of discs that remain in their proper bin space can be considered the tail. If that record store doubles in space, they can carry twice the inventory, and feature twice as many titles in the front racks and listening booths.  Now making the shift into the digital world, inventory is unlimited, and so is specialty placement on your store's website. That increase opportunity to sell special placement requires an increase of human resources.

So, I really doubt that, even if physical recorded music completely disappears, the distribution of it's digital counterpart will ever be zero. Infact it may possibly be as costly if not more.


Vil Vodka
Prez/CEO of Vodka Tonic Media
vodkatonicmedia@yahoo.com
http://www.vodkatonicmedia.com