Summary

- The music industry tried to cling to an obsolete business model far too long and suffered gravely for it.

- Spotify finally dragged the labels into a new era and revitalized the industry.

- Disney - and the other media companies - didn't learn their lesson from their adjacent industry's troubles.

- Netflix is the movie industry's Spotify. Cripple it, and you'll unleash a crushing wave of piracy.

- Almost all media stocks fell Wednesday; this is a lose-lose decision for Disney, Netflix, and third parties.

Shares of both Disney (DIS) and Netflix (NFLX) fell in after-hours trading on Tuesday and those losses extended into Wednesday's trading. That followed Disney's decision to pull its movies from Netflix going forward, and greatly expanding its own digital distribution ambitions.

And let's get it out of the way right at the beginning of this article. I think this is a bad decision, and the market is correct to be sending shares of both firms downward. Here's why - let's examine the parallel of what happened with music in the digital era.

The Death (And Rebirth) Of The Music Industry

The music industry was humming along just fine until the turn of the century. The evolution from records to compact discs resulted in a windfall for music executives, as many collectors ended up buying their favorite albums multiple times for ease of use across evolving formats. Additionally, a huge way of marketable pop music, including record sales tallies from late 90s pop acts put the industry in an especially complacent place.

Napster, of course, changed all that. When young users, particularly with high-speed university-furnished internet connections, learned that they could download their favorite songs for free, many did so. That alone wouldn't have caused a grave crisis for the music industry, however its reaction to the Napster threat was woeful.

It relied primarily on lawsuits, against Napster and other copycat download sites, and also against the consumers themselves. At the same time, the industry actively stifled digital efforts. They made it hard for the tech companies to build out digital distribution services. Additionally, online services found it difficult to create libraries that could compete with piracy, since the labels were so slow to license their music out at agreeable terms. On top of that, innovative web music players such as Pandora (P) were hit by such high costs per reproduced song that they were never able to go mainstream in a way that would produce meaningful industry revenues.