It’s Berlin, Circa 1989, and the Media Industries Are East Germany

by James McQuivey, Ph.D.
Follow me on

Allow me to add my voice to the chorus of those applauding the fall of the Berlin wall twenty years ago this month. It was this event that taught me firsthand why revolution is simultaneously impossible as well as inevitable. In 1986 I sat with other students from around the globe just blocks from the wall and debated whether it would ever come down. The naïve among us insisted freedom was imperative: It was inevitable. The others asked if we had stopped to think about the massive relocation of people, economic resources, and government structures that such a revolution would require: It was impossible.

Until it happened, just three years later.

 

The author, pictured left, photographed in front of the Brandenburg
Gate from what was then the East German side

Such is the content industry’s less political but equally momentous dilemma. Walls are crumbling on every side: First the CD and now the DVD. Traditional structures that held entire industries together like little Warsaw Pacts are under threat. Media companies that deal in any flavor of print, audio, or video are under siege from the economic effects of content digitization, forever altering how content is created, packaged, and distributed.

At Forrester we call this the Media Meltdown and though we’ve been documenting its slow dissolve for some time, it’s high time we declare that 1989 is upon us – it’s time to actively tear the wall down rather than watch value continue to trickle out around the edges. We must rebuild the media industries anew: goodbye analog inefficiency, hello digital economics.We recently published a report called How To Rebuild The Media Industries, in which we issue this call. We’re no Reagan, but we issue the call with the same clarity: Stop building value on your supposed content and distribution monopolies because digital economics have forever reduced barriers to competitive entry. Publishers and producers, someone else can make that content for less money. Networks and distributors, someone else can package and bundle the content more efficiently. And movie theaters, retailers, cable networks – anyone who delivers content – there are new alternatives to you popping up every day. How? Because the analog assets and processes you built your empires on will soon hang around your necks like dead weights wile new digital competitors enter unencumbered. Some will dispense with analog assets in one fell swoop as Conde Nast did with Gourmet, others will whittle assets down to the bone like Disney did to Miramax, while some will cut as much internal fat as possible while keeping up external appearances as Newsweek has done.

And that’s just the internal wrangling over budgets. When you serve external customers, you’ll change what, how, and when you distribute content. Sony Pictures will stream Cloudy With a Chance of Meatballs to owners of Sony Bravia connected TVs before it’s available on DVD. This is just one example of how to seize the economic advantage that comes from serving consumers at a new, digital, level of convenience. You’ll have to embrace the devic consumers embrace – connected TVs, smartphones, and eReaders – offering content as a service that spans multiple platforms, and charging for the convenience of easy access to what you provide.

In the last two months I have been on the road presenting our view to dozens of clients and to others in larger, less private settings. Some chirp that this is all obvious and inevitable, why do we even bother to write about it? Others squawk that we can’t possibly be serious – have we never stopped to consider how impossible such a massive relocation of labor, assets, and economic value is? To the former, I applaud your naiveté and welcome your bold moves in the market. To the latter, I encourage you to learn your history lesson. Those who rebuild now will still be here to discuss the finer points of the digital transition ten years from now. Those who do not, will not.

_____

Note: a version of this post was also published on Paidcontent.org, though without the attractive retro photo

Oprah abandons broadcast TV for a life in cable: Oprah, we need to talk...

by James McQuivey, Ph.D.
Follow me on

Just this Monday Sarah Palin told Oprah she was "the queen of talk shows." Which might mean there's no better time to abdicate the throne than when you're clearly on top (and when the #2 talk show, Dr. Phil is produced by you). 

But Oprah didn't just announce that when she wraps her 25th season in 2011 she will wrap the show for good. No, she announced that she would also begin the next chapter in her mega-successful life: she's going to move to cable. Her cable network, titled OWN, for Oprah Winfrey Network, was actually announced some time ago, so while that's not news, the fact that Ms. Winfrey is moving away from daytime television's most-watched show to build a fledgling cable network is an eyebrow-raiser. 

Because cable TV is no safe haven away from the woes of broadcasters.

Audiences are fragmenting, cable TV is having a harder and harder time maintaining viewers in the face of the DVR and Hulu one-two punch. In fact, OWN was supposed to be up and running this winter but was postponed because of the challenging advertiser climate. It's a climate that's not going to get dramatically better even if our economy continues to improve. That's because advertisers have many alternatives for their advertising dollars, including the Internet, where more and more spending is shifting every day, reaching nearly $26 billion this year (see our July 2009 Interactive Marketing Forecast report for more detail).

Does that mean we're waving Air Oprah off the cable runway? No, we think cable is a great place for the Oprah empire. Beyond 500-channel programming lineups that are under threat, cable does have some serious advantages going into the next decade including high-speed broadband connections and control of the home network. Then take one look at O magazine and you'll see a smorgasbord topics that can easily feed a cable network and satisfy Oprah's devoted followers using those technologies better than they're used today.

That's why we offer Oprah our free advice, as if we had her here on the couch in our very own studio. Here's what we would say:

• Insist on Internet delivery of your content. Existing cable networks -- including Discovery Communications, your 50-50 partner in OWN -- are stuck in contracts they negotiated under analog assumptions. They involve separate licenses and all kinds of exclusive restrictions for linear feeds, VOD content, and online content -- which is why there's precious little of the latter coming out from cable nets. Tell your new cable MSO partners that you understand their need to make money from subscribers and from advertising -- offer to help by leading them to the future, insisting on a single license to your shows that they can use online, over mobile, and in VOD. But require that they invest in reaching your audience with those platforms with the threat that you will if they don't. Which leads to...
• Charge for access to your experience. If you can help it, don't roll yourself up in tier 1 of the cable lineup -- while it is tempting to make a grab for a large audience, you want people to pay for you like they do for Disney. You're not just charging for content, however, you're charging for access: your customers will pay for convenient access to OWN on multiple platforms so they can get their fix in the living room, kitchen, bedroom, or even when applying the mascara you recommended in the bathroom. On whatever device they happen to be near. Even if you do go tier 1, you can always make multiplatform access a premium experience -- tie it to the magazine subscription if you must, but do it. Help us prove that people will pay for what they value: easy access, on any device, to content they believe in.

You get the picture: cable can be good, as long as it's a different cable than the one we all currently experience. So while these points are a bit technical and Oprah probably has people that take care of these things, that's what we would tell her if we could have a face-to-face. (Yes, we might also blather on about our favorite Oprah moments, including the Flashmob with the Black Eyed Peas and 20,000 fans in downtown Chicago, but if we could stay focused on business, that's what we'd say.)

What Google Could Bring to Digital Music

[Posted by Mark Mulligan]

Follow me on

There are numerous reports that Google is about to launch a music service.  Whether the rumours have foundation or not I think it is worth reflecting on what role Google could play in digital music and their various assets.  Here are some initial thoughts:

 

• Google is already a major player in the online music space via YouTube (in Europe, the home of Spotify, more people watch music video online than listen to streaming music)
• Google shouldn’t (and probably won’t) try to be an ‘iTunes killer’.  The bottom line is that the iTunes / iPod / iPhone ecosystem is successful within that niche, but it is just that, a niche.  The 99 cents download model isn’t a mass market proposition
• Google has its Android asset to leverage, potentially ensuring it is a truly cross platform music play
• Google is in a unique position to target music demand at the earliest possible stage i.e. when consumers start searching for music

 

The last point is where I think Google’s core value proposition for the music industry comes in.  Apple can do little about iPod owners downloading from BitTorrent (and our survey data shows they are very likely to do so).  But Google on the other hand can.  Just imagine if when a consumer searches for a song, alongside all of those Torrent results is a heavily integrated Google music offering.

 

Whether or not there is any substance in the current rumours, Google could play a major role in online music.  What will be at front of mind for them though will be learning their lessons from YouTube, i.e. not hemorrhaging cash and not getting bogged down in rights holder spats.  If they have the appetite for it Google could bring something new and incremental to the digital music equation.

Spotify: Comes With Music's Latest Threat

[Posted by Mark Mulligan]

Follow me on

As I referenced at the end of my previous post, Spotify – the European streaming music service – has struck a deal with UK mobile operator 3, bundling the cost of their premium subscription into the phone tariff.  I’ve done a few press calls on the story today and the recurring question has been “where does this leave Nokia’s Comes With Music”.

 

Although the business model and value proposition are very different in many respects (thus suggesting risk of direct competition is low), there are also many similarities. Both offer unlimited music free to the end consumer, and now both are mobile. The distinctions between streaming and downloading is becoming increasingly irrelevant to end users (though rights bodies will continue to obsess about the distinction). The differences the consumer feels are of course what matters.  Given that CWM and Spotify have comparable catalogue, the key differences between fully subsidized mobile offerings will be:

 

1. Ownership of the music
2. Amount of music you can play ‘offline’
3. The device / service experience

 

The latter is what will really count.  Ultimately what people want from a mobile music experience is something that works well as an extension of their device (compared to a PC centred experience where demands and expectations are higher).  In effect mobile music services have to work well as a feature of the handset. So Spotify and CWM both need to achieve deep handset and operator integration (e.g. permanent home screen buttons etc.) to make the experience feel like an integral feature of the phone experience. If either achieve that, and create a compelling business case for operators, they’ll stand a good chance of success with multiple partners, by being a feature rather than a service.

Can Media Products Ever Actually Deliver What Consumers Want?

[Posted by Mark Mulligan]

follow me at Mark_Mulligan

The question may sound excessively controversial, but perhaps less so when worded in another way: Where should the product development balance be struck between consumer wants and business imperatives?

All consumer products should meet the needs of the target consumers right?  Well yes and no.  Of course if you fail to meet consumer needs a product will fail.  But at the same time not every consumer demand can be met, certainly not at a price that those same consumers would be willing to pay.  For consumer product managers at consumer electronic companies these will be highly familiar concerns.  But now media companies are finding themselves thrust into a product manager’s crash course. 

Throughout the peak years traditional media companies didn’t have to worry too much about product innovation.  They focused on their core competencies of developing great content, and then marketing and programming it.  In the age of the Media Meltdown though those assets alone just aren’t enough.  The fundamentals of many media products need wholesale review (see my previous post for some specific analysis from the music perspective.)  But most media companies will find themselves needing to take a much more proactive role in this process. 

This is because media companies can’t rely on the technology companies to do the product innovation for them anymore.

Historically technology companies have driven the format evolution of media consumption e.g. record player, the Compact Cassette, the CD, VHS, the DVD, High Definition TV etc. Typically the media companies had to play a hasty game of catch up as they worked out what business models they could build around them (and they didn’t always do so willingly cf cassettes, VHS) but the outcome was almost always a new premium media product.  Which in turn normally drove unprecedented revenue growth.  Now though, a major change has occurred. 

Now that all content is (or can be) digitized for, and by, consumers the focus of technology companies is on creating devices that enable convenient consumption and management of that digital content.  The subtle but crucial difference is that this technology is no longer dependent on a centrally controlled, formal source of content supplied by the media companies.  A record player and a CD player were both close to useless unless you bought some prerecorded music to play on them. An iPod works just fine as a music player even if you've never spent a penny on music in your life - it's just as great an experience whether you download from UseNet or buy CDs from Amazon.  New technology innovation doesn’t any longer create obvious product opportunities for media companies.

There is a clear need for technology companies and media companies to establish new types of partnerships and deeper working relationships to ensure that they can ultimately better meet their business needs.  Otherwise you end up with half hearted efforts such as the iTunes album.

Yet in the face of rampant free alternatives, how can a media company develop products that deliver enough value at a cheap enough price (perhaps even free to consumer)?  The cold harsh reality is that free illegal alternatives will always beat a legitimate service on price and will probably trump it on content depth also.  There are though other ways media companies can differentiate.  Regular readers will know that we've been developing a framework for digital content product development based on the 4Cs of Digital Content: Content, Convenience, Cost and Community. Media product innovation based around these 4 principles will be the media companies' ticket out of the Media Meltdown

To this end Forrester is kicking off a series of Music Product Innovation reports that will put forward some very specific concepts of what future media products should look like.  The first one will be published soon and is entitled ‘Music Product Manifesto: The Product Features That Will Save Recorded Music From Its Impending Demise’.  (Watch this space for more details).

As we embark on this programme of research we’re engaging with the marketplace and digging deep into our consumer survey data to help us plot out future scenarios.  As part of this process we’d love to hear your thoughts.  So let us know what you think, whether you’re a media company, a technology vendor, a device manufacturer or you’re simply interested in the topic.  Either way we want to hear from you!

Music Release Windows: The Product Innovation That The Music Business Can’t Do Without

[Posted by Mark Mulligan]

follow me at Mark_Mulligan

Forrester has just published a report which lays out a radical vision of the future of music products.  In the report we suggest that a comprehensive programme a product innovation is necessary to save the music industry from the current Media Meltdown it finds itself in.  The CD is dying, the 99 cent download model clearly isn’t enough (nor is live), and ad supported and subsidized models all have much distance to go. 

 

The immense challenge is to persuade consumers that music is worth paying for again.  The scarcity that music value was built upon was disappeared with the rise of Napster.  Content scarcity can never be truly regained so value must be reestablished with the scarcity of convenient, compelling services operating within three broad music release windows.  These release windows will stagger content releases, with premium services getting releases first and ad supported services last (see chart below). 

 

 

But we believe that even more needs doing in addition to this, most pertinently a radical overhaul of the core music product.  The album has been with us for exactly 100 years and though formats have changed, the core product (i.e. a collection of linear songs) has remained largely unchanged. We propose that the straight jacket of album format can now be shaken off and in its place releases can become part of a continual artist-fan relationship with artists delivering a steady stream of creative output.

 

So where does all the extra content come from?  Well much of it is already here.  Artists have been creating a much wider range of creative assets for some time now (back stage footage, covers, remixes, mobile apps etc) and record labels now have access to this content via 360 deals.  We argue that this content should no longer be seen as a way of selling albums and gigs, but as an end in itself.

 

This is an MTV Moment in the digital age for the record labels.  They only realized that music videos were a value commodity in their own right rather than just a promotional tool by the time MTV had established a successful business.  Now it is time for them to learn the same lessons about added value content.

 

Finally, we also propose that music product innovation should be built around the 4 Cs of Digital Content: Content, Convenience, Cost and Community.  The more eagle eyed of you will have noticed that this idea has changed a little since my previous post on the 3 Cs of Digital Content.  Why?  Well we listened to your comments!  We’d always assumed that Community was an integral element of digital content services, but we took the advice on board that it needed to be more than a sub text.

 

If you are press and would like more information on this report then please email PRESS AT FORRESTER DOT COM.  If you are a Forrester client and would like to discuss it further then please get in touch with our Inquiry team.

Spotify's Marathon

[Posted by Mark Mulligan]

follow me at Mark_Mulligan

The news that Spotify’s mobile app is now available for the Android platform, coupled with an anticipated Autumn US launch, are both part of the music service’s inexorable rise and media interest.  Spotify undoubtedly has momentum and potential in abundance.  But, even without considering the issue of cash burn, it is also important to keep a sense of scale. Spotify has done a great job of acquiring a sizeable audience after a short period of time, but needs many more users before it can be considered on a par with some more established services that get a lot less attention (these days at any rate).

 

In the chart below I have mapped the number of users of Spotify and a number of other key free music services, each from launch.  What is clear is that Spotify has made a solid start is growing at a stronger rate than Pandora was at the same stage.  If Spotify ever reaches Pandora’s scale and business model viability, it will rightly be considered a success.

 

But it is also clear that other services like Last.FM and imeem grew more quickly.  And just to put the absolute scale of Spotify into perspective, the Pandora iPhone app alone is mapping almost exactly in line with Spotify’s entire user base. (No coincidence of course that Spotify see the iPhone app as a crucially important ticket to further success).

 

So what can we conclude from these numbers? 

 

• Extrapolating Spotify’s early user growth suggests that if it is sustained it could reach the 20-30 million user range within 2 years
• A US launch will significantly accelerate audience growth (all of the other services mapped here have US reach.  imeem and Pandora have reached their scale in the US alone.)
• Spotify will need to accelerate its revenue model maturation if it is going to be able to sustain this projected level of growth 

 

The last point is key. All of the other services in the chart have had to deal with the challenge of audience cost sustainability:

 

• imeem has had well publicized financial difficulties with WMG writing off millions of debt.
• Last.FM recently closed its free service to countries it couldn’t operate in profitably
• Pandora closed its non-US operations when it couldn’t strike deals with rights owners that would enable it to operate profitably in international markets

 

Spotify has run a fast first lap, but it is a very, very long race.

How To Survive The Media Meltdown

  
[Posted by Nick Thomas]

Follow me at Analystnick

The lead story on UK news bulletins this morning was the latest results from commercial broadcaster ITV. Two observations, even before we get into the detail of the story: big media companies, due to their prominent role in our lives, have a deep resonance with the public in ways that, say, a ball-bearing company, would never have; and the media meltdown— where traditional media business models based on scarcity and control are fundamentally challenged by the new realities of digital media consumption — is now high on the mainstream news agenda.

 The focus of today’s news is on ITV’s losses and the sale, at a knock-down price, of its social network Friends Reunited.  The broadcaster’s business model, heavily reliant on advertising revenues, leaves it exposed to this shift, whereas rival broadcaster (and major ITV shareholder) BSkyB has succeeded as a platform business, offering telephony and broadband alongside Pay TV. ITV has made the right noises about focusing now on its online video proposition and acquiring more of its own content to exploit. Neither will be easy, however, and successful execution will be the key here. ITV’s track record, looking at its failure to develop Friends Reunited (by no means a bad purchase at the time), is not great.

 Surviving the media meltdown will require a reinvention of some business models, some hard decisions and some bold product innovation. I’ve been writing extensively about this topic in a series of documents, and today we publish my latest take, How To Survive The Media Meltdown: Identifying Successful Content Strategies. I’d love to hear your thoughts on this.

Sicilian Musings

[Posted by Mark Mulligan]

follow me at Mark_Mulligan

I'm currently on holiday in Taormina in Sicily for a couple of weeks and though I come here every year (my wife is Sicilian) I never cease to be amazed by just how different the profile of technology adoption is here compared to northern Europe. Just trying to get online over the last couple of weeks has been a case in point.

 

I had a few pressing work tasks which I needed to do during my stay so I ensured I was well stocked up with credit on my USB modem.  Unfortunately the Italian network of my UK mobile operator didn’t seem to have read the script about discounted international data roaming fees and I managed to burn through 35 pounds of credit in 2 and a half days (which included 3 extended ‘help’ line calls – I use the term ‘help’ in the loosest possible sense - and getting a relative to buy more credit in the UK).  The fact that the download speed made a 56k modem look like Fiber just added to the pain.  Unlike my friends and family in northern Italy, the majority in Sicily don’t have home Internet connections so I have to resort to Internet cafés, the majority of which share one sub standard connection between a couple of dozen computers.  However this year I needed to connect my laptop directly and my normal Internet café of choice wouldn’t let me plug in my laptop directly.  Finally, I found one with Wi-Fi (just arrived this year) and got online.

 

It really shouldn’t be this difficult just to get online in the 2009.  Which got me thinking about the implications of these sort of technology hurdles on European digital content strategies.

Taormina is no decrepit backwater, it’s a sophisticated and prosperous town, but the Internet just doesn’t feature that highly in most people’s priorities here.  Life functions perfectly well without it.  And sure, the Italians love their mobiles, but most of the people I know here use their phones to talk and text, not to download digital content.

 

So how do you reach would-be digital content buyers here?  You might argue that they don’t need to, that they’re still buying CDs and DVDs.  I’m afraid that not many people I know here buy much music anymore.  There are a couple of hardcore aficionados who I normally rely on for tips for new sounds, but even one of those (who’s actually an ex-minor Italian pop star) has stopped buying CDs.  Where’s he getting his music from?  He’s one of the few who has broadband at home and he got it mainly to download music and video from file sharing networks.  So file sharing plays the familiar role of the killer app for driving broadband adoption.

 

None of this is new of course, Europe is a diverse region of technology adoption, but what my experiences here have reminded me of is that headline figures about technology adoption hide the fact that sub regional adoption trends vary massively.  It’s all well and good saying that Italian broadband penetration is x%, but what is more important to understand is how adoption varies between Milan, Rome and towns in the south.  It’s simply not realistic to expect consumers in so many areas of Europe to be ready yet for paying for digital content.  They are however, easy and quick converts to file sharing.  We could debate the pros and cons of that equation, but it’s a fact.  Better to spend the time deploying compelling free and ad supported services which are genuine immediate alternatives to illegal downloading. 

Monetizing Social Music: Choosing The Right Product And Services Strategy

[Posted by Mark Mulligan]

follow me at Mark_Mulligan

Forrester has just published a major new report on Social Music.  This is a crucial period for social music and ad supported content more broadly.  The dynamics I discussed in my previous post (What Happens When the Ad Money Doesn’t Go Round?) apply to social music more than most other digital content sectors.  The implications are also pivotal for the music business.

 

With CD sales continuing to fall off the proverbial cliff and the paid download market failing to take up the slack, social music destinations are prospering, utilizing the power of the Web to a degree that download stores never did.  Social music may not generate much revenue now, but all stakeholders (i.e. labels, publishers and the services themselves) most work in concert to ensure that monetization effectiveness significantly improves, but at sustainable rates for the businesses.  In doing so, social music it will become a key revenue stream that will help fill the gaping hole left by lost CD sales.

 

Forrester identified three tiers of social music fans in the US and Europe:

 

• the sophisticated users of the likes of imeem, Last.FM and Pandora
• those who visit artist pages on social networks such as MySpace and Bebo
• those who view music video on sites like YouTube

 

Social music fans are savvy, engaged, and love music.  Our research reveals that preconceived ideas about them being freeloaders are wide of the mark.  They are in fact much more likely to buy music than most other consumers (across all formats and channels).  This is an opportunity which is being actively monetized by many of the services.

 

In the report we also provided detailed analysis of the competitive landscape and map the growth of key destinations over the last few years.  A current snapshot of the installed base of some of the key player is:

 

• YouTube:  344 million
• Facebook:  175 million
• MySpace: 139 million
• Imeem:  25 million
• Pandora:  24 million
• Bebo: 22 million
• Last.fm:  20 million

 

YouTube and MySpace are the heavyweights of social music (Facebook has scale but the role of music is more limited).  YouTube and MySpace have both built their music positioning upon a foundation of free music.  YouTube’s current spats with various license holders illustrates that content owners feel they should be better compensated for the increased engagement these sites are seeing.  The outcome of the PRS dispute with YouTube will be pivotal as it will set the rules of engagement for the mid term future of social music,

 

The report delves into the above issues and many more in extensive detail.  Forrester clients can find it here.

 

If you are press and would like more detail please email PRESS AT FORRESTER DOT COM