Some thoughts on alternative business models for digital media?

The commonly agreed upon cause of the shrinking music market is illegal filesharing or pirates. Thanks to ever increasing broadband speed this filesharing is certainly not limited to music but will sooner or later threaten all digital content. The film industry just broke another record.
Thus, will connected “consumers” all around the world be the death of the digital media business? Or are those illegal filesharing numbers rather a symptom for misaligned business models than the cause of market failure? Personally I belief the latter is true. So are there alternative business models the industry can build on? Certainly! Here are two of the most famous approaches - and the problems they have:

  • find other income sources for substituting your loss
    The concept is clear. If an industry cannot charge high enough prices (or no price at all) for covering their costs of sales (plus some profit) the lacking revenue must be substituted through something else. In the case of streaming media: advertisements. In the case of downloads: concerts and merchandise for music, for film only merchandise and for software…well. This already indicates the first problem I see. But let’s go through this a bit more structured:

    • Ad-supported content:
      There are two major problems I see with advertisements:

      • Advertisement repels customers! Nobody wants to see them. Particularly not if one is looking for something particular, like a song, software, etc. Thus, the challenge remains to balance content and advertisement, what is far from simple.
        One approach for “solving” this problem (or rather an excuse as I see it) is to make advertisement so custom-tailored that the user does not even perceive it as an ad. I have no idea when this is going to happen, but I believe not any time soon. AND Google-Ads in my Googlemail analyzing the content of my email for presenting “personalized” ads to me are far from custom tailored solution. I generally don’t even see that they are there. They are simply not detected by my perceptual system. Why? Peoples attention is generally focused on the task they are carrying out. Any ad first needs to get this attention. This is a disturbance many people probably don’t need. But what if we manage to make advertisements cool, personalized and unobtrusive?
      • If the user clicks an ad someone has to pay for it. Generally this is the person or company advertising. For a company the only reason for advertisement is to increase their own sales (not to sponsor some other industry). In 2007 world-wide sales of recorded music (that is physical and digital sales as well as performance rights) amounted to 19.4 Billion US$ (a sharp decline of 30.8 Billion in 2000). How many cars, consumer electronics, white goods, or what so ever, you think the world could buy to compensate for that?
        Through advertisement-supported models money is simply pulled from one industry selling goods and advertising them to another industry taking out those ads. If ads should compensate declining incomes from digital content this money needs to be earned in another industry. Could 683,098 more cars  have been sold in 2007 (average price 28,400 US$; flawed comparison, I know)?
    • Compensation through concerts and merchandise
      Artists are increasingly being told to give away their digital content for free and think about it as PR. The people would appreciate that and spent more for value packages, concert tickets, etc. This approach comes with a couple of problems, too:

      • If all artists give away their music for free the PR-effect of artist X giving away his/her music for free would be marginal. Radiohead could certainly benefit from being one of the first bands going this new path. But imagine all music would have been released that way for already 10 years. Which PR-effect would Radiohead’s move have had? Probably none.
      • Certainly, if digital content is free it will spread faster and reach more people, as it’s stickiness is being reduced. The question remains, though, how many more people willing to pay more for some value packages, etc. can be reached by this? Enough to pay for the development of that digital content plus living costs? Doubtful and based on the wrong market assumptions. Internet, connectedness and reduced information stickiness allow us to utilize the longtail. Thus, the credo should be to reach more people paying less and not to reach more people in order to convince a few of them to pay more.
      • To play more gigs at higher prices won’t be able to substitute the income from record sales. For the artist and their management maybe, but not if the whole industry, that is record companies, event companies and other service providers, want a piece of that cake. The reason is very simple: Concerts do not scale and ticket-prices certainly are capped. There will never be a Robbie Williams concert without Robbie and there is a physical limit of how many concerts an artist can give per year. And there is a limit of how much one can charge for a show.
      • Obviously, for software merchandise and concerts are not applicable.
  • (voluntary) collective licensing:
    Another approach postulated for solving the problem the digital industry is facing is simply to collect a rather small fee of all people using a certain service. This is known as collective licensing. One can further differentiate between voluntary and compulsory collective licensing. Here this differentiation does not really matter, so I won’t go more into details (if you want to read more, read this). We probably all know this approach from over-the-air television and radio. The fee is collected through some collecting societies (in Germany this is the GEZ). Most people call for the ISPs to play the collecting societies. The regular ratio is: we have X Million users. If we claim 2 or 3 $US from each we’ll be able to collect a vast amount of money. That’s correct. But as I see it, the problem here is not the collection of a lot of money, but the JUST distribution of that money!
    Those, who drive the market most, i.e. those whose tracks or software is downloaded or swapped the most, should receive the largest portion of this cake. However, in a market, where, due to old day revenue models, not the creator of some valuable digital content, but some intermediary has the largest market power a just distribution of this revenue seems highly doubtful. The artists will pay the price!
    Beyond, any approach that adds another intermediary to the value chain without creating additional value (and that is what collecting societies are) reduces the value chain’s efficiency. In other words: collective licensing models are an inefficient solution.

Is there no efficient alternative? I believe there is and with SellYourRights we’ll deliver that. The idea is to have artists, software-makers and other IP-holders to directly license their work to the whole market. A direct and efficient collective licensing, if you want to call it like that, where the price will be determined by consumers and artists only. Not by some third parties bargaining power or lobby.
Currently we are developing the framework for this service and the network to launch it. If you are interested, drop me a mail and stay tuned…

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