Market View
The Lowdown on Downloads
Written in cooperation with the Economist Intelligence Unit
The advent of digital media has transformed the music publishing industry more than any other. Traditional means of distribution are being swept aside, as the virtual product supersedes the tangible form. What are the lessons for other industries that similarly hold vast stores of popular content?
“It is the understatement of the decade to say the music industry has changed a lot,” remarks Douglas Merrill, formerly Google's CIO and now President of Digital Business at EMI Music. For the younger generation — the mainstay of the music industry — buying music off the store shelf is becoming outmoded. They are more likely to download their favorite tracks digitally from online stores such as iTunes and Napster. Forrester Research thinks that sales of digitally downloaded music will overtake physical CD sales in the U.S. and Canada in 2012.1 With increased broadband speeds and processing power, video distribution looks set to go the same way.
Record labels and film studios have much to gain from embracing digital distribution. “There are huge advantages,” says Michael Olson, Senior Research Analyst with the U.S. investment bank Piper Jaffray, which specializes in online media. “There are higher margins since there is no expense for physical distribution. Suppliers also are able to revive content that is collecting dust.” For studios, this could include old TV shows and films that cannot be placed on store shelves but can be distributed easily online.
Download sites can cross-sell other products with greater ease than physical stores. New cost models can be introduced, such as paying per download, renting for limited usage or the fast-emerging free, advertisement-based model. For example, Hulu.com, a website developed by NBC Universal and News Corp., offers free video streaming of TV shows and films in the U.S. It allows users to clip videos, or parts of videos, from the site for posting in online communities.
For EMI's Merrill, however, the main value of digital media for music lies in the relationship between artist and fan. He believes one of the jobs of the music label is to use digital media to connect the two in more extensive ways than before. “The question is, how do you help fans discover new music, and how do you help artists find new fans? And once found, what digital media should be deployed to reach fans? This is no easy matter," says Merrill. "Fans can be geographically dispersed and hard to target."
EMI is experimenting vigorously with ways to connect artists with new fans. These will include communicating via mobile devices and social networks. “We are thinking about all of the traditional channels where fans form groups,” says Merrill. “An analytical effort is needed to target them, but nothing has emerged yet in the music industry.”
Coming to Grips with Digital Rights
Another challenge content producers face is how to protect against piracy and other forms of abuse once content is sent. Digital rights management (DRM) for online media is an area of intense debate in the industry. Peer-to-peer (P2P) file sharing has been widely successful because the content downloaded is unprotected and, therefore, ubiquitous. Unfortunately, content owners may receive nothing in return for the consumption of their content, especially if it is pirated several times for each actual purchase. There are multiple DRM technologies in use by content download services, complicating the situation to an even greater degree.
“These challenges are significant,” Olson points out, adding that the music industry is coming around to waiving digital rights, whereas the film industry remains opposed.
“In the longer term, digital distribution will be more to the benefit than detriment of the entertainment industry,” Olson believes. The way forward is to keep content “open but protected,” he thinks. “It needs to be open enough to be played on multiple devices. The trick is how to do that while keeping it protected.”
Relaxing some control over content in the world of digital distribution looks inevitable.1 The End of the Music Industry as We Know It, Forrester Research, February 2008
