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Wednesday, December 10, 2008

Of Holiday Gift Guides and New Media Business Models
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This week's Wall Street Journal featured a special Journal Report entitled "The Way We'll Watch" on new movie technologies that will be available soon, some in time for this holiday season. It got me thinking about some of the business plans that have already been tried in the content industry in the past few years.

The content industry is at the tail end of a transition from distributing media on physical goods (CDs and DVDs) to digital downloads and streaming content. Distributing physical goods, whatever the container happens to be (wax cylinders, LPs, 8-track tapes, cassette tapes, DAT tapes, CDs, minidiscs, SACDs, DVD-Audio, and now flash memory) is a well-established business model that the content industry is very comfortable with. But most consumers are tired of lugging around their libraries with each album or movie on a separate piece of media that can be too easily lost or destroyed. Freeing the media from the container it arrives on (or distributing it via computer network without a physical container) allows the media to be easily time-shifted, space-shifted, format-shifted, and re-purposed (e.g. sampling). But the content industry is wary about giving up their old market and is terrified of piracy. So as it slowly warms to digital distribution, the content industry is trying to provide a taste of those conveniences in the old physical goods model. As a result we have the following interesting but ultimately short-term business models:

  • Self-destructing DVDs - A company called Flexplay makes DVDs that "expire" 48 hours after you open the air-tight packaging. They're sold at airport kiosks, which is about the only place this makes sense. Because if you will be playing the movie from a laptop (versus a portable DVD player), you'll get much better battery life playing from the hard drive instead of the DVD. But since lots of people don't bother filling their laptop hard drives with media before they fly, this gives them one more thing to do after they get through security and are waiting for their flight.
  • Selling music on memory cards - SanDisk recently announced that it had signed deals with the four major music labels to sell music on microSD memory cards under its new SlotMusic iniative. These memory cards are indeed smaller than CDs, and once purchased the memory cards can be filled with anything you like. But the cards used by SanDisk are so small (they're 0.4" by 0.6", about a quarter of the size of a postage stamp) they're actually hard to pick up and use. But while a smaller container does make transporting a large library easier, I can't imagine anyone that will actually swap these cards every time they want to listen to a different album. It's certainly gratifying to see the major labels sell DRM-free music, but the only group I see this appealing to are people who are not very computer savvy but are savvy enough to figure out how to load and use a SlotMusic card on their music-capable phone. And the format is still burdened by the realities of physical goods: Consumers are still limited to the selection in stock at their local retailers and retailers will have to deal with returning unsold merchandise. Like the the Flexplay DVDs, this may just be something sold at airport kiosks.
  • Speaking of kiosks, one "future" innovation mentioned in the Wall Street Journal article was kiosks at retail locations that burn movies while you wait. The idea of selling content via kiosk has actually been around for a long time. In the late 1980s, a company called Personics placed kiosks in music stores that made personalized cassette tapes. And since 2002, Redbox has had kiosks renting DVDs for $1/day, although these kiosks weren't burning the DVDs on demand. There has also been at least one attempt to allow consumers to legally download and burn DVDs at home, although that system was shrunk the size of their music and DVD departments. But renting movies still requires consumers to make a second trip back to the store to return the movie and kiosks don't have drive-through drop-off boxes). The kiosks discussed in the WSJ article, which sell the movies and have Internet connections, seem to be a better option, but if consumers are forced into using a screen and keyboard to buy their media, they'll likely just do it from their home computer.
  • Albums as digital downloads but sold at retail - I was in a Best Buy store over the weekend and I noticed some Sony Music Pass cards. The idea is that you purchase a plastic card with a scratch-off number on the back, and when you get home you use that number to authorize your download of the album. This concept just completely baffles me. Why would anyone pay for an album at a store if they don't actually get the album until they go home and download it? Even more crazy is the fact that Sony is selling mix albums this way (e.g. this and this). Why would I want to buy a pre-selected mix album when almost every digital download website lets me pick and choose only the tracks I like? And if I need to download the songs, why involve buying something at a store at all? There's really only one explanation: Christmas.

CDs and DVDs have been given as gifts since these formats were introduced. The options discussed above all allow digitally-challenged parents and grandparents to buy something for their iPod-toting relatives that the kids may actually appreciate. But a better choice is to get them a gift card that lets them choose the media they want. These types of gift cards are available for Apple iTunes, eMusic, Napster, Microsoft Zune, and Best Buy's own digital music store. Most of these provide music in DRM-free MP3 format which should play on just about all digital music players.

Digital distribution of music and movies (and TV) is here and it will only become more common. iTunes is already the top music retailer in the U.S. Because of the much higher bandwidth requirements of High-Definition video, it will take a bit longer before digital downloads are the top means of obtaining video content. But it's fast approaching. More than half of America already has broadband connections at home. Netflix and Hulu already offer HD content, and Netflix is accessible from a number of devices besides a computer.

If you're still confused about what to get your favorite geek this holiday season, I suggest the gift that won't go obsolete, won't expire, and that's guaranteed compatible with everything: Cash.

posted by Adam Marcus @ 10:48 AM | Capitalism , Generic Rant , Innovation , Mass Media

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