Show Me the Money: Extracting Value from Digital ContentPublished: March 30, 2005 in Knowledge@Wharton
The effect of digital content and new technology on the entertainment and media industries is: a) a devastating body blow; b) a profit-spewing bonanza or c) the creation of a promising market in its infancy.
The answer is all three, depending on whether you are talking about the beleaguered music industry, the fortunate movie industry or the cable business's hopes for digital cable. That was the message from an industry panel discussion at the Wharton Marketing Conference. The panel was moderated by Marshall Cohen, a media research veteran who spent 12 years at MTV and is now a member of the private investment firm Pilot Group.
The troubled music industry was represented by Camille Hackney, vice president of strategic marketing at Atlantic Records Group. She painted a grim picture of the record business where sales have contracted by 25% over the last four years due to music piracy by computer file sharers. "In the days of analog technology, record companies were printing money," Hackney said. "But these days the Internet is forcing a big change in the way we do business."
Hackney had harsh words for the record industry's lack of foresight and its dearth of effective countermoves to piracy. "We do a great job of confusing people and a terrible job of educating people," she said, adding that the music business could be doing a better job of convincing young people that music is worth paying for. And she bemoans the fact that multiple, noncompatible encryption standards are hampering the industry's attempt to earn revenue from the downloading of music.
Painting a far rosier picture was Jay Reinbold, vice president at Warner Home Video. Hollywood is swimming in cash from the sales of DVDs, which leverage content from theatrical releases and TV series into a digital format. DVDs have become the fastest-growing product in consumer entertainment, with U.S. sales of more than $14 billion expected this year. By 2008, U.S. sales are expected to more than double and worldwide sales could approach $45 billion. When DVD sales surpassed the take from theatrical box offices last year, they upended the financial equations of the industry. "DVD sales are now a primary consideration in making motion pictures," said Reinbold.
Piracy is an issue in the movie business, but nothing like the catastrophe that has hit the music scene. Hollywood is benefiting from the fact that the current storage capacity of most home computers would allow for downloading just 10 movies, as opposed to the thousands of songs that many teenagers easily manage on their PCs. According to Reinbold, as downloading of movies becomes more feasible, Hollywood will embrace it. But the industry has little incentive to hurry the pace of change. "DVDs have such large profit margins, we don't want to give them up." Feeding the growth in the market is consumers' interest in owning a library of DVDs.
Hollywood's love affair with the DVD is acting to slow the nascent growth of digital cable, said Page Thompson, vice president, marketing, of New Video Products at Comcast Cable Communications. That's because movie studios typically won't make a movie available to cable operators' video-on-demand services until 30 to 45 days after that same movie is available in a video store. The movie studios naturally fear cannibalization of DVD sales by video-on-demand, but Thompson argued that this fear is misplaced. "There is actually a halo effect," he said. "If you promote the movie through video-on-demand, sales will go up at retail outlets. It's all about raising consumer awareness."
Comcast CEO Brian Roberts has made it clear that he sees the future of the company hinging on the success of video on demand, which lets customers choose what they want to watch and when to watch it. "The personalization of TV is the future," said Roberts in a recent talk to Wharton MBA students.
Thompson, who has the job of making the future happen, said digital cable's biggest challenge is that customers have a hard time mastering its relatively complicated technology features. Many current users don't even know how to do basic navigation of the system. That problem of technology fluency may be surmountable with younger customers, but baby boomers could be a lost cause. "I try to get my parents interested in our new products, but they just want to watch the BBC," he said. Among analog subscribers, who are the vast preponderance of Comcast consumers, there is very little awareness of video on demand, Thompson admitted.
So the cable industry has its marketing work cut out for it. "Until recently the cable industry didn't have to market; people would chase the cable truck down the street to get the service," said Thompson. But now, with more complicated services, the cable industry is trying to educate customers that there's more to cable than additional channels. Comcast is purchasing advertising airtime on broadcast television and using its web sites to market its new video offerings. It is training its call center personnel to do a better job of selling new services. The cable giant also is adjusting the schedules of its installers so that when they are in a home installing digital cable they can have the time to demonstrate video-on-demand and other features. The price tag for such moves is steep. "The visit takes longer, of course," said Thompson, "so we have to hire more installers."
He believes that a tipping point for digital cable may come next year when he thinks interactive TV will start to take off. That upsurge will be made possible by the arrival in more customers' homes of cable boxes with additional memory and programming power. The first applications are likely to let viewers play along with game shows and also cast a vote about what's happening on their TV screen.
The recording industry, meanwhile, is trying desperately to find a way to get people to buy more music CDs. At first the industry tried putting additional music or video content on a CD as a way to make it more valuable than a download. But experience showed that this tactic just increased costs and didn't sell more units. "If you are not an Usher fan, putting an Usher video on a CD is not going to make you buy it," said Hackney. So now the music industry is striking marketing alliances with companies outside the music industry to provide "in-disk incentives" such as coupons for athletic gear in hip-hop releases. "Were trying to provide a better value so teens will buy the CD," said Hackney. The industry is also trying to collect the e-mail addresses of fans as a cost-effective way to let them know about new releases.