The Price of Inaction in the Digital World: A Cautionary Tale

Monday May 19, 2008 – Antonette Goroch

What can the video industry learn from its music-industry cousin about digital distribution of its products? That inaction can result in irreparable damage.

Attendance at the National Association of Recorded Music’s (NARM) annual convention held last week brought together music-business participants who are still stumbling through the transition from traditional to new distribution of their products. The event, held in San Francisco, where the giant downtown Apple Store cast a long shadow over the gathering was a fitting illustration as to why the packaged music media business is in such dire straits, and how continued inaction can only bring more turmoil to the business. Indeed, Apple’s iTunes, which just surpassed Wal-mart as the largest retailer of recorded music, provided a fitting backdrop for the event, which this year included “Digital NARM”, a subset of the conference focused exclusively on digital distribution issues with representatives from companies like Napster, MySpace, Sandisk and Motorola.

While the context for this discussion was music, the issues are the same in the video world—how to preserve the core businesses, while embracing new distribution models and strategies. There were familiar debates— How DRM can decrease or eliminate piracy while facilitating a valuable customer product and experience…What business models and price points work for both the customer and distribution value chain…What are the new modes of delivery for content via mobile and Internet…What are the roles of social networks and Web communities in content sales…

But the music industry (like the video industry) still seems stuck in these debates, with very little resolve, as the large players focus on experimentation rather than full scale implementations of digital distribution strategies. The price of such inaction is clear, and serves as a cautionary tale for the video entertainment industry—continued declines in CD sales and billions of songs downloaded for free over peer-to-peer networks by a new generation of consumers, even as legal digital distribution sales reach record levels.

The chart illustrates how electronic distribution of video will be a significant part of the video-entertainment landscape. Although pre-recorded DVD discs will continue to ship in the billions of units annually, there will be little or no growth in the DVD business, while iTunes video sales will experience significant growth. And Apple is not the only supplier, although it is currently the largest one.