Tech Could Drive a Deflationary Cycle

But that ease of distribution and the leveling of this playing field are having some negative impacts on the music industry, with piracy the most visible form. From its roots in Napster(NAPS Quote) to the modern-day BitTorrent and other P2P programs, the playing field for music distribution has been so evenly leveled that millions of consumers are willing to use their time and energy and risk a criminal record to provide free access to any song ever recorded. Anyone who can tap into the Internet can make any piece of music content available to anyone else on the Internet, and the costs to enter the business of content distribution are practically zero.

It's hard for the entrenched music industry companies like Warner Music Group(WMG Quote) to compete with "zero," as in, free.

To be sure, Apple(AAPL Quote) and its legal iTunes music downloading store, as well as the other legal music sites around the Internet (including, ironically, the "new" Napster store), are helping battle this runaway music-industry problem. Legal music stores attract customers by guaranteeing the quality of the music and listing it at extremely reasonable prices, providing a new revenue source for the music companies. But again, note the words "extremely reasonable prices." Even when purchased legally, the cost of buying a great song has gone from $15 when bundled on a physical CD to 99 cents on a legal site to free on a P2P network. Can you say deflation?

Now, consider all the industries and products onto which this analysis can be projected. Any recorded content that can be digitized, including movies, TV shows, business telephone listings, written content and software will feel the impact of these forces.

There are two ways to look at the Internet and ease of distribution it enables. On one hand, it will drive prices ever lower, and depending on how willing people are to steal content (and if the billions of songs freely looted every day on the P2P networks are any indication, they're very willing), the ability to control pricing of these goods will evaporate. It's arguable that it already has. On the other hand, the instant gratification and ease with which this content can now be purchased through an explosion of outlets, combined with the elasticity that will come from ever-lower prices, could enable content owners to grow earnings through all kinds of new revenue streams.