I’m fascinated by the Palm Pre.

Because it’s a metaphor for the record business.  Company too long in the tooth, that missed the future, throws the long ball and prays for one last victory, which will keep it alive.

Unlike the labels, Palm threw out the old and started anew.  They didn’t try to update the old OS, they wrote a new one, from scratch, shepherded by an Apple employee.  Why the Cupertino company could not prevent this with some kind of non-compete flummoxes me, but the Palm Pre was released to glowing reviews and tepid sales.  But, with the announcement that the Pre would be available on Verizon at the beginning of next year, one held out hope.  But now those hopes have been dashed.

Apple just sold a million of its new iPhones.  Which can be added to the 40 million other iPhones and iPod Touches in the wild.  Can you beat critical mass?  Possibly, but you’ve got to have apps.

That’s the problem with the Pre.  Not only have they got almost no apps, they haven’t even released the software development kit allowing coders to write apps.  It’s like having the best record store, the best online distribution method for music, and no inventory.  You just can’t go anywhere.

Can Nokia or RIM or Android make inroads?

Fascinating question.

But more interesting is what does the landscape look like when the iPhone is available on all carriers?  Does it marginalize all competitors?

That’s what’s fascinating online.  There’s one outlet.  One iTunes, one Amazon.  The record business keeps saying they want to build more stores, utilizing the metaphor of bricks and mortar online.  But that concept doesn’t travel.  Online, every store is right next to the other.  As a result, he with the best product, which is not only about price, but usability and design, triumphs.  Facebook kills MySpace.  But more importantly, no one can compete with iTunes.  Why would you buy somewhere else?  Where it’s more difficult to find the music and you don’t have the auto-sync of iTunes/iPod?

So, the fear labels should have with Spotify is not whether it can make money in the short run, but whether it will be dominant in the future, whether it will be the only app.

Music is free.  Argue all you want, but if you can’t hear your favorite tracks online at no cost, you don’t know how to work a mouse.  The key is to bundle music with other desirable items.  Which is the key to Spotify Premium.  It’s not about how many ads can you insert in the free version to piss people off, it’s about how enticing can you make the paid version so that everyone will want to belong?

In other words, how can you create a tribe, that everyone wants to be a member of?

That’s what the label business has done poorly.  They sell and forget.  The key is to entice and retain.  Make people feel like they belong.  If Spotify becomes a giant club, just like Facebook, it gains stickiness.  But what will keep people as members will be the product and the privileges.

If you’re a member of Spotify Premium, you get tickets at a pre-sale before AmEx.  Yup, AmEx is a club, why not put Spotify in line ahead of the card company?  If you’re a member of Spotify Premium, you have a crack at limited autographed merchandise.  You can compete in auctions.  You get a chance at access!

The key is to close the curtain, erect a wall behind those who won’t pay.  That’s what Apple does best.  Create an eco-system that you must pay to join.  You don’t have to pay to play at all.  You can buy a Nokia, one of those texting phones instead, but you don’t get the apps.  The reason the iPhone is triumphing now is the app store.  Sure, the brand is cool, the design is great, but the apps are the blow job.  The apps exhibit a creativity long squeezed out of the music sphere.  Apps are not built for everybody, but vertical niches.  Check out the Top Ten apps at the iTunes Store, you haven’t heard of most of them.  But collectively, they’re an industry!  That’s the future of music.  The 50,000 apps are the 50,000 bands, vying for attention, not by compromising themselves to appeal to everybody, but containing credibility and edges that make them appeal to a hard core who will stand by them for years.

Does Apple allow Spotify to launch on the iPhone platform, ultimately owning the music sphere, marginalizing its own iTunes Store?  History would say no.  Both Apple and Microsoft have erased competitors by including previously paid for independent applications as part of their subsequent operating systems.  So, does Apple end up trumping not only Spotify, but Napster and Rhapsody to become the one true streaming outlet?

Instead of standing at the stern, worrying about what you’ve left behind, go to the bow.  Instead of trying to figure out how to get people to pay more for individual tracks, figure out how to get them to subscribe to a service that delivers more than music.  Instead of trying to get a few pennies today, think about all the dollars you can rake in over a decade.

Computer history tells us we end up with one winner and a marginal competitor.

On the desktop, we’ve got Microsoft and Apple.

In chips, we’ve got Intel and AMD.

In search, we’ve got Google and…

There’s a good chance we may end up with one dominant player in the music distribution sphere.  Rather than try to grow competitors, it may be best to hook your star to one winner, and partner as opposed to being a thorn in its side.  Instead of bitching about Spotify, give the service more content, non-track content, that will make it win.  Be ready for the moment music is streamed on the iPhone.  And know that the consumer is king online.  He’s got reams of information at his fingertips, you can’t pull the wool over his eyes.  You must be fair.  And give more, not less.  The iPhone has proven that people will pay for something that is not vitally necessary, that is not air or food.  A free cell phone will make calls, but it won’t tell you where the nearest good restaurant is.  The iPhone will do this.  The app may be free, but the handset and service are not.  People will pay.  It’s just a matter of how you bundle the product.  Trying to get them to pay a per track price for music is futile.  Wrap it up with access and other privileges and you’ve got a winning strategy.