Disruption
David Pakman's Blog www.pakman.com

If Tablets Are The Future Of Print, Where Are All The Print Publishers?

Jul 07

The iPad was announced on January 27, 2010 and was quickly heralded by many in traditional print media as a potential rejuvenator for their troubled businesses. Having used the device daily for the last six weeks or so, I must admit it is the perfect media consumption device, among many other things, for all of my reading (books, magazines, newspapers, blogs, tweets, FB feed, emails, web sites). Given my propensity to multitask, I crave multi-purpose devices and find the Kindle far too limiting a product, especially for the price. The iPad is perfect for email, calendaring, surfing, reading books, digesting RSS feeds, browsing real-time web feeds from Twitter and Facebook, watching movies while traveling, listening to music, checking weather, tuning in to baseball games, and countless other things. It is a far better way to consume magazines and newspapers than any other electronic device I have seen.

Given this, more than five months after it has been announced and the developer tools made available, and more than sixty days after shipping, why is Wired one of the few print publishers to make the leap and offer a version? The WSJ has a decent app (but downloads take forever), the NY Times has an anemic reader which showcases only a handful of stories each day (many duplicated in each section), the NY Post released an app which just offers pictures, and Vanity Fair offers a meager PDF of the print magazine for a whopping $5 per issue. USA Today seemed to step up with a nicely designed app. But it’s telling that so few of the traditional print publishers have taken the last five months to rethink the way a magazine or newspaper ought to be delivered digitally and devote sufficient resources to getting something great out on time. Wired’s editor Chris Andersen made some noise about how his staff did this, but frankly their implementation is also mostly a glorified PDF with some videos thrown in. Amazingly, URLs are not hot-linked in Wired nor Vanity Fair, email addresses are not clickable, text is not selectable nor are articles tweetable.

I think the iPad is actually underhyped as a device that will transform media consumption. I think, thanks to the forthcoming wave of tablet devices and better netbooks, the consumer PC is basically dead within the next three years (not so for PCs for the enterprise). But with this new opportunity comes the need for content companies to be aggressive in adapting to and adopting new platforms. We have seen countless examples of how native (i.e., purpose-built) applications prosper on new platforms whereas those migrated from a legacy platform never quite work. Doodlejump is the best selling game on iPhone, not Halo. Farmville is the biggest game on Facebook, not Mario Bros. Early adopters of new platforms tend to reap the rewards more quickly than the late entrants. Given the rapid pace of technology adoption (Steve Jobs says iPad is the best selling product Apple has ever released), consumers build loyalty to new brands more easily when they are the only ones available on a new platform. I advise our companies to be aggressive in adopting new platforms. Crunchyroll, a leader in the anime video space online, had a great iPad app available days after the device shipped. It is this level of aggressiveness that the traditional media companies must adopt in order to build consumer mindshare on these platforms.

It is easy to say, “Only 3MM iPads have been sold.” But given there are only 13,000 apps for iPad written so far, there is plenty of room for best-in-class apps to reach audiences much larger than their analog print equivalents. NPR, for example, has a great app that has been downloaded more than 350,000 times (as of mid-June).

Conde Nast had to go the embarrassing route of announcing their intention to deliver iPad versions of their magazines back in March but have only a few examples above to show for it, shortcomings and all. Where is The New Yorker? Cosmo? Glamour? Oprah? Better Homes and Gardens? Architectural Digest? People? The Economist? New York Magazine? National Geographic? (Update: NG is available as a PDF for sale through Zinio, but you’d never know it by searching. See comments below.) Can you imagine what type of experience could be built for the iPad and other tablets with the content of these magazines? Yet none are available. Where are the hip magazines? Paper? Paste? Even Rolling Stone, heralding a rebirth of late, is absent.

Here are the top magazines by circulation (as of end of 2009 by AdAge) and who has at least shipped an iPad app (√). Looks like a whopping six out the top 20:

  1. AARP The Magazine
  2. Better Homes & Gardens
  3. Reader’s Digest √
  4. Good Housekeeping
  5. National Geographic (Update: √)
  6. Woman’s Day √
  7. Ladies Home Journal
  8. Family Circle
  9. Game Informer Magazine
  10. People
  11. Time √
  12. Taste of Home
  13. Sports Illustrated √
  14. Cosmopolitan
  15. Prevention √
  16. Southern Living
  17. AAA Via
  18. Maxim √
  19. O, the Oprah Magazine
  20. AAA Living

This resistance to adopt early and experiment by incumbents is precisely what provides the opportunities for startups to create value quickly and disrupt markets.

The Sad State of the Old Music Business

Apr 25

I read with sadness this New York Times profile of Irving Azoff and Live Nation. As my friend Andy Weissman asked, “How divorced is this world from reality?” The article reminds us of the way the music industry worked for many decades: a world of power by those who manage artists and run record companies. This power was derived by getting artists to agree to allow these moguls to negotiate and navigate their career decisions. Of course, the fans only cared about the artists and their music, but someone had to make business decisions, negotiate contracts and approve marketing plans. I don’t begrudge the many successful music industry executives who built lucrative careers and giant fortunes from the many good decades of music business success. They helped shaped the careers of literally hundreds of great artists.

imgresIn surveying the state of the business now, however, many of the decisions made by these very same executives over the past 12 years have resulted in nothing less than complete failure. The recorded music business, which used to be largely responsible for more than 60% of the revenue an artist generated, now brings in about 9% of an artists take (this number from Azoff himself.) The recorded music business at about $18B $17B worldwide is a shadow of its year 2000 peak of $40B. And I don’t see its fall stopping any time soon. In fact, I really think the recorded music business goes pretty close to about $6B – $8B over the next 5 years. And that’s worldwide.

The story of this decline has been well-chronicled. In fact, the mistakes of this industry are studied daily by executives in the movie, book, television and newspaper industries as a recipe to avoid. (I’m not so sure those execs have quite taken away the right lessons, as I have posted about many other times.) There are only two music industry segments in better shape than recorded music: music publishing and live music. The former hasn’t declined nearly as much thanks largely to the increased use of music in advertising and, to a much lesser extent, increased revenue from satellite and internet radio. Live music, as the NYT article makes perfectly clear, has stayed healthy for two reasons: (1) the magic of a live show can’t be pirated online and (2) huge consolidation in venue ownership, promoters and ticketing has allowed a massive increase in ticket prices. It’s hard to celebrate this second fact as a revival of an industry. In fact, I think it is the bellweather of its end.

I agree with Azoff that tickets were underpriced for many years. Scalpers have always showed us that the market had a curve to it that was not optimized by, say, two or three ticket price points. The rise of secondary ticket markets like StubHub showed us that there were more efficient and orderly ways to maximize profit. But massive consolidation and monopoly-building usually signals that there are no other growth opportunities left for a market — the market participants grow by consolidating and raising prices. Azoff’s belief that Live Nation’s upside is in selling t-shirts and fan clubs to the fans sounds like something I heard in 1997 during internet 1.0 days. It’s not only not innovative, it is precisely the opposite of what fans are looking for from the music industry.

I think, like many others, that we have been witnessing the atomization of artistic culture. The internet gives us far more choice than the limits imposed upon us by broadcast media. We know of more bands, we can get tour dates pushed to us, can sample music long before it is released and we can reserve tickets well before the show. But we are doing this across many more artists, spreading our limited disposable income around in ways we didn’t when we had fewer choices. Nevermind that we are offered billions of other entertainment choices from video games, YouTube, Facebook games and even Crowdreel and Bitly.TV.

The future of the business is atomized and decentralized. It is one where the collective power of the many fans actively engaged in discovery and sharing have more power than a few senior execs calling the shots about marketing budgets. Yes, there will always be superstars, largely gained by taking those who are bubbling up and pushing them through the mass media still remaining. But today’s superstars sell a fraction of records/downloads as the ones from years past. And yes, there will always be American Idol programming which is really more about entertainment than it is about creating great music. But the new power, in my mind, is granted to the aggregators who pull together our collective wisdom. The music business today is blogs, Twitter tweets, Facebook links, the Hype Machine, TheSixtyOne, Rockwood Music Hall, Pandora and Foursquare. Honestly, I discover far more music today from hypem.com (an aggregator of the best music blogs) than I ever will from the decisions of record execs and promoters. We will continue to pay Mr. Azoff’s company’s service charges for the privilege of seeing great live music if and when our favorite artists reach big arenas. And fewer and fewer artists will. But if you are going to bank your future on nothing more than raising prices and selling me more expensive t-shirts, the fall will be mighty indeed.

Instead, where might today’s execs focus their energy? Providing tools and assets to empower the many fans willing to do their marketing work for them. Terry McBride has articulated many times that the secret to his artists’ success is by giving fans the music and other goodies to share with friends, evangelizing their favorite artists. Shouldn’t the music catalogs be available through a click-wrap API, paving the way for thousands of new music filters on hundreds of thousands of web sites? Shouldn’t music be decentralized? Not free, but just available everywhere, especially to developers to create more engaging and relevant online music experiences. Music needs to become part of the fabric of the web, not an overlay on top of it. Like I can embed my Twitter stream anywhere, I need to be able to embed the music driving my life all over the web too. Not just the song names, the music itself. I have a need to share it, but I really can’t today. If this happened, the businesses that could be built on top of it are quite interesting. The data becomes the value here enabling the new generation of music programmers to emerge based on the collective and specific expertise of the masses.

The tech community creating digital media is filled with forward-looking businesses. In the past three weeks alone we’ve seen the launch of the iPad, new Twitter APIs, and extended Facebook Social Graph APIs. As Andy Weissman pointed out to me, “All, or none of those may work – but they are all forward-looking in their nature and in how they want users to experience them.  Live Nation is looking backwards.”

I am not arguing that artists should not be paid. But the ways they build their career, reach an audience, and then ultimately sell stuff to that audience, is fundamentally being turned upside down. Ecosystems based on sharing are the future. This is what the net native generation that is the future audience of all entertainment businesses know to their core. And Mr. Azoff’s shouting at business partners and squeezing fans for a few extra dollars on a ticket isn’t going to change any of this.

Author David Pakman
Comments 37 Comments

The Music Industry Admits Music is an Elastic Good

Mar 19

Readers of this blog know that, for years, I have insisted that music is elastic. That is, price affects sales. Higher prices produce lower sales, lower prices produce higher sales. There are outlier examples (Eric Clapton Rarities box set?) where the title appeals to die-hards who will pay nearly anything for it. But for the most part, lower prices spur higher sales. At eMusic, we knew this quantitatively and based our value proposition on it.

At eMusic, we met with the majors repeatedly to discuss this. With the exception of Sony (and later Sony BMG), all disagreed. Warner was the most vehemently against the notion. They hired a consultant named Frank Luby from Simon-Kucher who produced a report affirming Warner’s belief that music was not elastic, and in fact encouraging Warner to RAISE prices in 2008. Their work may have been high quality (and I admit I never saw it first hand), but our data at eMusic suggested a different conclusion.

As further evidence that music was mis-priced (too high), first in 2004 (click through to see Rolling Stone article) and then again in early 2008, Walmart began pressing the majors to lower their wholesale prices. They insisted their sales data showed that they could sell far more units if music was priced around $5 – $7 (with occassional high-demand titles at $10). They contrasted this with DVDs which Walmart was selling at $7 – $15. The industry resisted, and Walmart responded by reducing the amount of shelf space they dedicated to CDs, contributing further to the dramatic sales decline of CDs.

I applaud Jim Urie at Universal for responding to the demands of the market and altering CD pricing. The industry will be rewarded with increased sales. This move could have occurred years ago and brought further relief to a declining market. None of these steps will save recorded music, and the adjustments will continue to put pressure on the cost structure of the labels, but they will come closer to finding the optimal market price for CDs and thus help to maximize profit. The same must happen for digital tracks, something eMusic has demonstrated for more than six years now.

Author David Pakman
Comments 15 Comments

Weighing in on Amazon/Macmillan Pricing Debate

Feb 03

If you are following the eBook pricing dispute between Amazon and pretty much all the major book publishers, you know that this is indicative of the struggles most traditional media companies are having in adapting to lower-cost digital distribution outlets. As a quick summary, Amazon has been buying eBooks for its Kindle from the book publishers on a wholesale basis (reportedly around $12 – $15 per book). The publishers are hopeful Amazon would them mark the eBooks up and sell them for the same price as hardcovers, around $18 – $25 each. Amazon, with an eye towards building a large eBook market, and with all of its pricing data culled from its more than 90MM users, believes the right price for most eBooks is $10 or less. And as such, they have been willing to sell many eBooks at a loss, hoping to eventually force publishers to sell eBooks at a lower, perhaps optimal price. They would know. They sell gabillions of items to about 100MM consumers every day. Between them and eBay, they probably know more about the price elasticity of most goods than every good manufacturer out there.

Remembering your Econ class, you also know that most goods are elastic; as price lowers, demand increases. An optimum point exist that maximizes profit. I am pretty sure that the book industry, like the music industry before it, has not maximized profit by finding the optimum price. This is generally because the book publishers are not retailers — they have never forged a relationship directly with a customer. To optimize pricing (particularly on a per title basis), you need to conduct lots of tests and analyze lots of data. Amazon does this in near-real time and, I am told, is constantly optimizing pricing, page layout, merchandising, bundling, shopping cart path, and many other ecommerce variables.

While Amazon may have other motives for pursuing lower-priced eBooks (to sell more Kindles?), they are smart enough to know that once a market is established, it is hard to raise prices when competition exists. And with Apple entering the iBook/eBook market, they know they will have competition.

So, why would publishers NOT want Amazon to find the optimal profit-maximizing price? Because, like many entrenched media companies, they have massive legacy cost structures that don’t support selling books at, say $6 wholesale. They offer many unreasonable arguments against this: books are “worth” more, authors won’t make enough money, it’s bad for the industry, etc. These are not economic arguments, but are meant to maintain the status quo economics as long as possible. And it’s ultimately bad for them. The music industry has held firm that music is “worth” $1 – $1.30 per song, regardless of the track. For 7 years, they would not experiment with pricing under $1. (eMusic just convinced Sony and Warner last year to try…and I understand the results are positive.) But is all music really worth $1 a song? No, it is not. We know hundreds of thousands of tracks have sold 10 or fewer units digitally. That is the market telling you something.

As a way forward, Macmillan adopted Sony Music’s agency model which allows Macmillan to actually set the selling price for its eBooks and pay a sales commission to Amazon. You would expect that Macmillan would then be interested, since it controls pricing, in finding the optimal price. But I suspect its Amazon partnership does not allow it to get real-time feedback from price experimentation. And if they really were experimenting, you would expect that some people would see a title for $10 and others for $18.

The bottom line is that “value” or “worth” is not decided in a board room, it is decided by the market. And low-cost digital distribution, where the marginal cost of each incremental item sold is zero, brings consumer expectation that price must fall. They don’t care if the rent on your offices at 50th and Broadway are $8M a year. Traditional media companies whose products are going digital must accept lower unit selling prices and massively cut their operating costs in order to survive. Trying to play hardball with the market ultimately won’t work. See the music industry whose sales are now $20B worldwide, down from $40B, and I think are going much closer to $10B – $12B before finding bottom.

For more reading on this, see my post on piracy in the book industry, the movie industry ignoring market signals from Redbox, and a reminder of what we went through at eMusic with the music industry.

Author David Pakman
Comments 43 Comments

The Book Industry is in Trouble. But Piracy is Just a Symptom.

Oct 04

2871468537_7f4a83cc4f_bRandall Stross has an article in the NYT this morning suggesting that the book industry may soon get “Napsterized” — suffer the disastrous fate of the music industry, all because of piracy. This article performs revisionist history on the explicit actions of the music industry underlying its decline. Piracy has been a convenient culprit for media industries as their distribution shifts to digital, but it is not the only cause of their problems. It is largely a symptom of traditional market issues.

In the physical goods world, media companies maintain a monopoly over the distribution of their content. They control who can sell it, they price it at whatever level they deem appropriate and they determine if and when a consumer can buy it (think release windows). As all media goes digital, this monopoly quickly melts away. The content owner cannot control distribution (it’s too easy to copy a digital good) and as such they cannot control availability. When this control erodes, pricing pressure follows as consumers have a choice between buying and stealing.

The music industry, after the emergence of MP3 encoding in 1996, did not internalize this fundamental change. They believed they could maintain their monopoly on distribution by suing consumers who engaged in piracy, controlling release windows and limiting licenses to only a few digital outlets at the same prices of the physical goods. Consumers inherently knew that the digital good should be less expensive than the physical one (there are no hard good costs, after all) and demanded widespread access to digital downloads. It took the music industry seven long years until they broadly licensed Apple in 2003 with their full catalogs. In that time, consumers found the alternative — Napster, Gnutella and Bit Torrent. By the time iTunes took off, it was too late.

The book industry, with all this learning behind it, is making similar (but not identical) mistakes. They have licensed some of their catalog to a few eBook retailers. But there are still millions of titles not available for legitimate download. In addition, they have tried to hold pricing for the eBook at the same level as the physical book. Jeff Bezos knows consumers expect to pay less. So he subsidizes the price of eBooks in order to get the price to about $10 a book. When free is a few clicks away, convenience rules. The publishers should flood the market with their entire catalogs and price them at dramatically low prices. There should be hundreds of places to buy them online. They should make it painfully easy to buy an eBook, even risking the cannibalization of their physical books. They need to make the legitimate good superior to the pirated one.

The digital future for all media companies is likely a smaller market with inferior economics than the monopoly physical one they enjoyed for decades. To survive in this new world will require lower cost structures. But the result of not embracing this future are clear: just ask the music industry.

Author David Pakman
Comments 15 Comments

Ignoring Market Signals

Sep 07

RedboxWalmartPhotoI am fascinated by the Hollywood studios’ war with Redbox. Today’s NYT has a nice overview and my friend Rich Greenfield at Pali Capital has been covering this for some time (registration required). Most of the attention is falling on two issues: (1) Hollywood hates the one dollar per day price point, and (2) also hates that Redbox breaks their windowing strategy by offering new releases as rentals immediately as the DVD hits the market.

Redbox’s CEO, Mitch Lowe, knows he has stumbled on a model to which millions of consumers are responding. There will be more than 22,000 Redbox kiosks by December in places like supermarkets and Wal-Mart stores. Their volume is sufficient to scare the studios. The studios’ fears? Cannibalization of DVD sales. Their argument? DVD sales are down 13.5 percent for the first half of 2009 over last year and some titles are selling 25 percent fewer copies than expected while rental income is up 8% (NYT, Digital Entertainment Group).

What baffles me is that the studios still think they are in control. The only reason this model exists, like Netflix, is because of the first sale doctrine. This section of copyright law makes it permissible for anyone who buys a copyrighted work to resell it. Therefore the studios can’t stop a wholesaler or retailer, to whom they have sold a DVD, from selling it to Redbox. And they can’t stop Redbox (or Netflix) from renting DVDs, even though they hate the practice. In the digital world, there is no first sale doctrine, and that’s why your choices of which movies to rent or buy online are terribly restricted and unreasonably priced. The studios set the terms, and no unapproved and unlicensed model can emerge.

Redbox, and Netflix before them, have found models that consumers love. They are based on low price points and high consumer convenience. Time and again we know consumers respond to these models. Consumers don’t respect windows and profit skimming (even though these are intelligent business models). In the digital world, consumers have too much choice to adhere to restrictions imposed by copyright owners. Why buy DVDs when you can download any number of the 65,000 apps in the iPhone app store? Why pay for a digital rental that expires in 24 hours when you can watch six simultaneous channels of the U.S. Open on DirecTV for no extra charge?

We now live in an attention economy. The studios haven’t yet learned that they are dramatically competing for our attention, not just our wallets. To be successful, they must look for market signals, and man is this a big one: consumers will rent more DVDs when you price them low, put them at locations where they already are, and offer the newest releases. The alternative? We’ll just do other things. That is, until the transition to the digital world is complete. Then most of these models will go away if the studios have their way. Then, like the music industry, piracy becomes a better choice and a superior good (no restrictions, low-price).

I have talked before about the need to read market signals. Note to studios: here is a big one. You should be excited, not scared.

Author David Pakman
Comments 6 Comments

Netflix got it right. Will the Studios follow?

Mar 13

netflixIn trying to legally consume digital movies, there are two models: the Netflix way and everyone else. Let’s start with the latter.

If I want to watch a movie online (streamed or downloaded), I can go to Amazon OnDemand, iTunes, XBox Live, Vudu, and Sony’s PS3 platform. These are all generally the same: the selection varies from about 5,000 movies to 30,000 titles. I can download or view a DRM-restricted 24-hour rental (the download sits on my hard drive for 30 days but once I start playing it I have 24 hours before it “expires” and becomes unplayable) for $2.99 – $5.99. Or I can purchase a DRM-protected movie for $12.99 – $16.99. The DRM protections render the movies completely non-portable (I cannot take them with me, unless bought from Apple and used on an iPod). While that is not consumer friendly, the 24 hour expiration window is pure customer cruelty. Note to studios: why not just make the rental simply play once within, say, 30 days. Why must I finish watching in 24 hours? Just silly, really, and clearly meant to penalize those of us who have kids and/or work hard and have limited windows at night to watch TV. Can’t finish in 24 hours, TOO BAD! Buy it for $15, dude!

Or, you can join Netflix and come over to the good life. For $8.99 a month, you get one DVD sent to your home at a time, chosen from more than 100,000 movies. You get a fantastic queue system which allows you to essentially pre-order a rental as soon as you hear about a movie (long before it is even released on DVD). And now you can, at any time, as often as you like, stream more than 20,000 movies to your computer or TV (using a $99 Roku box). I am living in luxury folks. I can watch each movie as many times as I like, and take as long as I want to watch it. This is a company that understands and indeed caters to consumers’ needs.

I know the studios hate the model. Studio execs have told me they would be “out of business” if every service worked this way. But the adoption of the other models is paulty compared to Netflix’s. They have more than 10M subs and are growing like a weed. They are best positioned to migrate consumers into the digital movie world, because they can satisfy our need for vast selection with their physical/digital hybrid model. And they make the restrictions appear invisible. (True, no portability. But with WiFi on a plane, we’re getting there.)

Once again, I think the way to navigate the digital world is to remember that the consumer is in control. To win, you must satisfy them, not penalize them. (Last week’s studio idea: remove the bonus features from DVDs that are used as rentals in order to make people buy more full-featured DVDs. Um, good thinking.) It’s just too easy to steal, so better to offer me something superior to the stolen good.

Author David Pakman
Comments 2 Comments

NBC: Please watch our shows on Hulu (only sometimes)

Feb 19

File this in the, “Um, you’re kidding, right?” department.

Yesterday, NBC, one of the owners of Hulu, demanded that Hulu force Boxee to stop letting its 200K+ users watch Hulu programming through Boxee. Boxee, in case you haven’t tried it yet, is a wonderfully simply interface for browsing media on the net in a “lean back” experience. It is directed at those of us who have attached our computers to a nice TV screen and would rather watch Hulu, YouTube, and all the other free content on the web on a nice big screen, ads and all. Boxee is an internet browser at its core. It is not licensing content, selling you downloads, or directing you to stolen shows. It is making watching web-delivered video easier to find and watch. It is helping Hulu. Last week it sent Hulu more than 100,000 viewers.

NBC, who licenses thousands of shows to Hulu, in their wisdom, is getting scared. They are hearing about all these 20-somethings who are cutting their cable bill and foregoing the $80 a month to instead watch their faviorite shows online. They aren’t stealing the shows through torrent sites, mind you, they are watching them legally through the means that NBC is providing. The problem is that NBC makes an overwhelming amount of their profits through subscriber fees paid to them by the MSOs. The ad revenue they get from putting ads in Hulu are the digital pennies I refer to here.

While I understand the digital transition is challenging for big media, doing things half-hearted won’t help. If you want to beat piracy, you have to embrace the methods consumers demand. Boxee has done what AppleTV and all the other digital media adapters have not done which is to put a pleasant interface on the browsing of web-delivered entertainment. And they have 200K+ of the most savvy internet video viewers as their customers. What do you think those customers will do now? Throw away Boxee just to watch NBC’s shows? Nope. One of two things: watch non-NBC programming, or worse, steal NBC’s shows. Either result is a loser for NBC.

Tip o’ the hat to Dave Mandelbrot for a bit of prodding to post.

Author David Pakman
Comments 5 Comments

Memo to Studios: Break the windows

Feb 05

2730802316_69cd981dd8Brad Stone and Brian Stelter have a piece in this morning’s NYT about the rising toll of piracy, or digital theft, on the TV and movie studios. We have heard this story before.

On the day last July when “The Dark Knight” arrived in theaters, Warner Brothers was ready with an ambitious antipiracy campaign that involved months of planning and steps to monitor each physical copy of the film. The campaign failed miserably. By the end of the year, illegal copies of the Batman movie had been downloaded more than seven million times around the world, according to the media measurement firm BigChampagne, turning it into a visible symbol of Hollywood’s helplessness against the growing problem of online video piracy.

Like their music industry brethern before them, the Studios are referring to these downloaders as “pirates” and “thieves” instead of what they really are…customers who cannot buy the product they want. I am not suggesting that all seven million downloads of Batman could have been sold, but certainly a great many of those people wanted to see the movie in their home as it was released. The problem was, they couldn’t.

The movie industry has used a windowing release strategy for years which basically skims profit from various demand groups of customers; those who want to see a movie on release weekend can go pay $10 to see it then. If you would rather see it free, no problem — you just need to wait about 18 months until it hits ad-supported TV. This has been fantastically successful and makes all sorts of sense. Except for now. In the digital entertainment economy, customers are in control. They won’t wait for entertainment product to hit a particular window. Customers expect to be able to watch what they want, when they want it, at a reasonable price and in a convenient format. This is the lesson of MP3 music. And customers are about to teach it to the studios.

It’s time for the studios to break the windowing strategy. There are challenges with this: they will certainly cannibalize sales of early window-ed product like theatrical releases and DVDs. But by doing so they will avoid forcing digital customers to seek out pirated copies in order to satisfy the demand for the movie. For the Dark Knight, Warner Brothers spent more than $100M generating demand around the theatrical release of the film. Only a certain number of recipients of that advertising intended to see the film in a theatre. The rest of us might have been interested in seeing it too that same weekend, but in our home, or on our iPod while traveling. Those options were not available to us. So seven million people went out and stole the film. Why not sell it to them too?

Breaking the window model is probably impossible in Hollywood. It is so tightly ingrained in the culture of its distribution system. But digital consumers have new expectations, and they are in control. Content owners must adapt to the reality that they must now win over customers and ask them to buy their products, but they must first make sure they are selling the products in the formats and at the time the customers expect.

Author David Pakman
Comments 2 Comments

Invest in Music Startups?

Dec 27

2272129886_d1548ebe64In my first few months at Venrock, I have seen many music deals. I’m happy that entrepreneurs and existing digital music companies have sought me out to look at their companies. The unfortunate truth, however, is that we are unlikely to invest in many music companies in 2009. Here’s why.

The digital music business is not an attractive sector for VCs and investors in general. This is largely due to the economics of the underlying licensing deals. The great mistake the major labels made was to set licensing terms in punitive ways, treating start-ups as predators instead of partners. They still have not realized that they must innovate their way back to consumer relevance. The best way to do that is to partner with leading entrepreneurs. If they treated these relationships as partnerships, they would have set terms which allowed joint business success. But voluntary licenses never allowed for that, and as a result, I can think of only two or three digital music business (out of hundreds) which have built actual businesses on top of licensed music (iTunes, eMusic & Rhapsody — note Pandora is successful but does not depend on voluntary licensing.). Even sadder, the best entrepreneurs have moved on. I have seen dozens of great pitches in the past few months and none are around music.

I don’t expect this reality to change in any meaningful way in 2009. The record labels and publishers need a generational shift in their management teams and a drastic alteration to their compensation structures to encourage risk-taking, investment in new businesses, and allow for cannibalization of their existing, declining business. They need to embrace come-one, come-all licensing, offer simple, transparent and equitable licensing without demanding arbitrary advances and guarantees. Otherwise, the only businesses which reach scale and are interesting to consumers will be the infringers (like Project Playlist) which we’d never fund as infringers.

I honestly hope this all changes. I still believe there are far more interesting digital music services that consumers would support, but there is little incentive for great entrepreneurs to build them.