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

by James McQuivey, Ph.D.
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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

New Forrester Report: Consumers Weigh In On Paying For Content

[Posted by Sarah Rotman Epps]

In the past year, we've seen a palpable shift from newspaper and magazine publishers with regard to paid content--they still don't know how to make paid content work, but they know they want to try. A recent report from the American Press Institute underscores this trend: The API reports that 60% of newspaper executives say they're considering paid content options, even though currently 90% don't charge for any content online.

Consumers, though, have different ideas. In a new Forrester report, we find that most consumers (80%) say they wouldn't bother to access newspaper and magazine content online if it were no longer free (no surprise), and the rest are split about how they'd like to pay for content:

It's especially notable that, while publishers talk about micropayments so much you could design a drinking game around the word, only 3% of consumers say they'd prefer this method of payment for newspaper and magazine content.

This data suggests two things:

1. Publishers should continue to offer free, ad-supported products to the 80% of consumers who won't pay for content online; and
2. Publishers should offer consumers a choice of multichannel subscriptions, single-channel subscriptions, and micropayments for premium product access.

But one size won't fit all — consumers want choice. The need for a multichannel product and pricing strategy is further reinforced by the "what if" scenario of print being discontinued. When we asked consumers, "If the publications you read were no longer available in print, how would you prefer to access that content?" we found that no single channel dominated responses. Thirty-seven percent of US consumers say they'd prefer to access content on a Web site, and smaller percentages say they'd prefer access via portable devices like mobile phones (14%), laptops and netbooks (11%), or eReaders like the Amazon Kindle (3%). Notably, 10% say they'd prefer the anachronistic solution of PDF by email.

Again, this points to the need for publishers to provide consumers with choice: There's no one delivery platform, and no one pricing model, that will satisfy all consumers. Consumer willingness to pay is so modest — and, in general, we find it tends to over-report in surveys — that publishers need to be extremely flexible to accommodate the needs of these precious customers.

Taking Digital Music To The Mainstream: The Music Product Features For The Living Room

[Posted by Mark Mulligan]

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What is interesting in the current scramble for the killer online music business model is that there is an implicit assumption that the only place people would want to go from the CD is online or mobile.  The iPod heralded a new paradigm in music consumption, but it has done little to counter the impact of the CD's terminal decline and may even have helped accelerate it.

 

As things currently stand, the mass market music consumer isn’t being catered to with any form of new product and the fight for these consumers’ living room is being lost.  It wasn't too long ago that the home hi-fi system was the flagship piece of living-room technology but over the past decade, living-room tech spending has shifted firmly to the TV while the aging home hi-fi system is either gathering dust or has been replaced by a docking station. (The latter of which is an awkward attempt to make a personal device a household device, and besides, the majority of households don’t even have one).

 

The time has come for new music products and experiences that cater for the mass market and that - for the non-tech savvy majority - bring the home music experience into the 21^st century.  In our latest report ‘Taking Digital Music To The Mainstream: The Music Product Features For The Living Room’ Forrester puts forward a vision of what we think is needed. 

 

We propose that the new mass market music experience must be explicitly part of a new hardware experience that is contemporary but highly competitively priced.  Our conceptual technology is a hard drive, midi-sized music hi-fi that with a detachable touch screen display / remote control. We argue that the new hardware must:

 

• Deliver a compelling experience even if not connected: it’s just too risky to assume that mainstream consumers will have the inclination or know-how to connect a music product to a home network, even if they have one.
• Include extensive music at point of purchase: this is, we think, the crucial element.  Mainstream consumers don’t have the appetite for another format replacement cycle, so we suggest the device should effectively replace their entire CD collection and add more, all for the cost of the device.  (And yes, we know this is light years away from where current licensing values are). And in case you didn’t notice – we just invented a new music consumption paradigm here, and a new role for retail.
• Provide the tools for baby steps into the digital world: for those consumers that do connect we propose a convenient range of digital discovery and acquisition applications to encourage consumers towards the digital arena.
• Leverage telcos: we want these devices to be affordable, but to really go mass market they probably need subsidizing by a telco e.g. a Sky Songs broadband package would include the device bundled with the router.

 

Of course there are many other ways this challenge can be met, but met it must be. Unless the music industry enters the battle for the living room, it will soon lose it — and with it the mainstream music consumer.

If you are a Forrester client and would like to discuss the report in more detail then please schedule a call with our client inquiry team.

If you are press and would like more information on the report please email Press AT Forrester DOT COM

New Roku boxes make the simple complex

by James McQuivey, Ph.D.
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Today Roku launched two new players to complement the original $99 Roku player. Perhaps somewhat obviously, the two new players come in at $79 and $129, allowing Roku to test whether there's price elasticity in this market. 

I'm not sure this was a necessary move. The cheaper box (called Roku SD), simply removes HD playback from the original Roku Player (now called Roku HD). The $129 version offers wireless-n wi-fi streaming to deliver dramatically better video quality. I don't personally need that since I hook up my Roku player -- which is in constant demand in my home -- via ethernet. (Yes, being a nerd has its advantages including a fully self-wired home that has over 24 ethernet ports in it.) So while I can see the value of the more expensive box for wi-fi users who have wireless-n routers (do you know if you do? betcha don't know), I think muddying the waters with 3 boxes instead of a maximum of 2 just feels like unnecessary complexity. A bit like Amazon announcing it would sell two versions of the Kindle in the US, one that's domestic only and one that can roam abroad, a decision doesn't appear likely to last very long.

What I'm really interested in seeing is what Roku's communication team promised when it assured me that all three boxes "will be compatible with our new upcoming Roku Channel Store" which is promised to launch very soon. I'm very eager to see this store and have been pushing on Roku for any information about its contents because that's where this gets interesting. You see, even though I'm big on connected TVs, from what I'm seeing, most are not going to deliver much in the way of content other than Netflix (as Roku does) and some VOD from Blockbuster or Amazon (also as Roku does). Roku can keep the connected TV threat at bay simply by providing some rocking content. I have my heart set on a Pandora experience, one that's visually-enhanced, please, to provide some cool screen action during playback -- take some cues from the Zune desktop experience, simply fabulous. But there are other good content options available, including a Hulu subscription I would gladly pay for. By the way, in case you were wondering why Hulu was thinking about charging, this is why. Once they charge you, they can put their shows on all these devices. I expect Roku to be first in line to sign the partnership agreement. 

Music Product Manifesto: The Product Features That Will Save Recorded Music

[Posted by Mark Mulligan]

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Forrester has just published the above title reported, the first in our new ‘Media Product Innovation’ series.  Following on from the strategy laid out in ‘Music Release Windows: The Product Innovation That The Music Business Can’t Do Without’ this report proposes some tactical implementations of that strategy.

 

As we’re now 100 years on from the first commercial album release with recorded music sales plummeting, the time has come for a radical overhaul of the recorded music product range. We believe that future music products will need to adopt a platform-agnostic world view that encompasses powerful and social interactivity to empower consumers to create their own unique experiences.

It is time to build music products around consumer needs, not business needs

 

That might sound like a truism, but so much of current digital music innovation falls short of this crucially important value.  This is why Forrester proposes a Music Product Manifesto of six basic consumer music rights that digital products should embrace.  These are spelt out in detail in the report, but include principles such as:

 

• The right to great consumer experiences first (and business models second).
• The right to unique music experiences.
• The right to share in the creation process.

 

I mentioned earlier that the report has a strong tactical focus, and it does, so strong in fact that we actually scope out our ‘show home’ of the future music product (see below).

As you can see this looks a lot like a mobile application.  This is because we believe that powerful interactivity is going to be key to successful future music product innovation.  To such an extent that the consumer is empowered to make the experience their own and to bring their connected friends into that unique experience.  And yes, a touch screen  netbook would be the perfect form factor for such a product...

 

I hope I’ve been able to give you enough of a flavour of our vision here.  If you are a Forrester client you can read the entire report here.  If you are press and are interested in writing up a story you can contact our press team at PRESS AT FORRESTER DOT COM.

 

And of course, I’d love to hear your thoughts directly here on this blog.

Apple's App Store vs Apple Music Store: The Race is On

[Posted by Mark Mulligan]

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Apple today announced that 2 billion Apps have been downloaded from its App store in just over a year.  The App store has taken just 5 quarters to hit the same milestone that the music store took 14 quarters to reach (see chart below).

 

Granted we’re not comparing like for like here.  Many (most?) of those App downloads will be free, and the iTunes platform is mature now, whilst it was nascent during the emergence of the music store.  Indeed, the App Store’s success is built upon the prior success of the music store.

 

But even with those caveats aside, it is worth considering that whilst all iPods and iPhones support music store downloads, only 24 percent of all devices sold support Apps (i.e. the iPhone and the Touch).  Put a different way, to date the total number of iTunes tracks per sold supported device is just over 39, whereas the total number of iTunes Apps per sold supported device is 40. 

 

So in just over a year the App store has reached the same maturity of adoption among its addressable device audience as the music store took 6 years to reach.

 

This doesn’t mean that music downloads are dead: at 8.5 billion downloads to date Apple music store is more than 4 times as successful as the App store in absolute terms.  But in the context of potential, momentum and addressable audience adoption, the App Store is setting the pace.

Can Media Products Ever Actually Deliver What Consumers Want?

[Posted by Mark Mulligan]

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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!

Is Apple Playing a Subtle But Smart Platform Strategy?

[Posted by Mark Mulligan]

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I have to admit to being a bit under whelmed by Apple’s announcements today.  I’d been hoping for something a bit grander from a music perspective.  I’ve spoken about the iTunes Album launch and explained my thinking that it falls short of what it could have been.  But on the other hand there is an argument that Apple’s relatively modest tweaking might be part of a bolder strategy: that of establishing iTunes as a platform that explicitly coexists with the big name social platforms, namely YouTube and Facebook.

 

Apple is all of course all about selling devices.  But part of that strategy is building compelling user experiences that establish and reinforce the value of usage scenarios of their portfolio of devices.  This is the context into which to consider approving the Spotify app, enabling posting of iTunes song information into Facebook and Nano captured video into YoutTube.  From that perspective Apple is playing a smart game that builds the social context of their devices as explicit extensions of the value proposition of the iPod an iPhone ranges. 

Take it one step further and you could even build an argument that Apple are building a range of devices that are flexible enough to mould around the degree of social engagement the user wants.  Interestingly this strategy echoes much of Nokia’s current positioning and also establishes a scenario in which iTunes builds as a media platform coexisting with the large established social platforms. Social context becomes what defines and reinforces the position of iTunes and Apple devices.  Sounds a lot like Nokia’s World view?  I think so.  Perhaps finally Apple are taking some of Nokia’s vision rather than vice versa?

iTunes Albums: A Decent Start, But Not the End Game

[Posted by Mark Mulligan]

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So today Apple announced the long anticipated new ‘music format’ codenamed 'Cocktail', productized as ‘iTunes Albums’.  There are some nice features (photos, exclusive videos, lyrics, customized artwork) that deliver a good user experience.  It’s a quantum leap from the standard album download.  But is it enough?  I think it is a useful transitory step, but not the end game.  I’d go as far to say I think it it pulls its punches.  The bottom line is that music buyers are rapidly falling out of love with buying the album. Downloads from stores such as Apple’s iTunes are predominately single tracks, as are P2P downloads.  Little wonder when you consider the fact that the first commercial album release made its way onto the shelves almost exactly 100 years ago in April 1909.  Since then it hasn’t changed in any meaningful sense.  Sure the actual mediahas changed, as has the number of tracks, but it remains essentially a bunch of linearly programmed tracks. 

 

Music fans are dissecting the album because they can. Tagging photos and lyrics to albums will be welcome new to existing album buyers but isn't enough to persuade the single track generation to convert to album buying. Now has come the time to embrace the potential that throwing off the straight jacket of the album format allows (see my previous post for more on this).  iTunes Albums bring much added value to album, but it is essentially a face lift rather than the new product that it required.  Of course this is a first release, so in future iterations I’d like to see much more interactivity and for iTunes Album and iTunes Pass to come together to become the delivery channel for releases as a continual artist-fan relationship rather than just a platform for the stop start album release schedule. 

Spotify's Marathon

[Posted by Mark Mulligan]

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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.