The greatest threat to Apple's ( AAPL) dominance in the portable music player business won't come from other consumer electronics manufacturers, Edgar Bronfman Jr. said Monday.Instead, it will come from operators of wireless telephone networks. Bronfman, chairman and CEO of Warner Music Group, suggested it wouldn't be long before operators such as Vodafone ( VOD) become major distributors of music via third-generation networks and cell phones with memory comparable to that of current portable music players. Those network operators, said Bronfman, have advantages such as a secure, piracy-resistant network and distribution base of phone-carrying customers much larger than the 5.7 million iPod portable music players that Apple has sold. "Ultimately," said Bronfman, "that's the biggest competition." Bronfman's Monday presentation at the UBS Media Week Conference in New York shed light on the strategic thinking of a key player in the music business. Bronfman, formerly vice chairman of Vivendi Universal ( V), earlier this year led a private investment group's buyout of Time Warner's ( TWX) WMG, and is reportedly planning a public offering of stock in the coming months. But while Bronfman made a compelling argument Monday that digital technologies harken a promising future for the music business, he has had poor luck in the past in converting a strategic vision into a profitable investment. Bronfman was a big backer of onetime Vivendi chief Jean-Marie Messier's attempt to create a worldwide media conglomerate from a French utilities company. But Bronfman's investment in Vivendi, along with that of other shareholders, tanked as Messier's strategy collapsed and Vivendi suffered a cash flow crisis. In his discussion of the state of the music industry, Bronfman indicated that he believed a weak fourth quarter -- finishing out a year that started with strong year-over-year growth -- would lead to full-year 2004 sales that will be flat with 2003 or slightly up.
Looking forward, Bronfman said that revenue derived from what is imprecisely known as "digital" distribution -- that is, delivery via the Internet or another data network rather than via a physical medium such as a compact disc -- would go from 2% industrywide to between 25% to 27% in 2008, according to industry forecasts. The music business is entering an "inflection period," Bronfman said, similar to the experience by the movie business in the early 1980s. That's when the value of filmed content increased, he said, because distribution outlets for video expanded from movie theaters and broadcast television to cable, videocassettes and other media. "The music industry sits at the beginning of that odyssey," Bronfman said. Among the revenue-generating opportunities for music in the mobile market, said Bronfman, are music videos, full-track streaming of music, ring tones and "ringbacks" -- the ring melodies that callers hear when they dial a particular number. But the possibilities in the digital market can be blocked by real-world challenges, Bronfman indicated. One problem with the download market, said Bronfman, was the lack of interoperability. Songs that Apple sells online, for example, can't be played back on players manufactured by Dell ( DELL) and other companies, he lamented. But Bronfman noted that Apple CEO Steve Jobs doesn't want such interoperability. And convincing Jobs of something he doesn't believe, said Bronfman, is "a herculean task for anyone I know."