The burst of the so-called “dot-com bubble” in 2001 proved the lack of alignment between technology, content and markets – an economy built on financial innovation instead of product innovation. However, a number of phenomena have altered this picture: changing demographics of Internet users, the growth of almost unlimited content, a pull for services from new market segments, development of the Internet as a service platform, and new solutions for mobility, convenience and ease of use. These trends lowered the barrier for alignment and control of technology, content, and markets, a new generation of service offerings in the digital entertainment space emerged.
One of the most notable of these is the simple yet highly effective Craigslist portal. Started in San Francisco by Craig Newmark as a method of creating community updates of social events, craigslist.com is now serving over 5 billion page views per month putting it at 34th place overall amongst web sites worldwide. The site today offers classified advertising and forums in approximately 450 different cities. Fees are only collected open job postings, and usage is free. While revenues are not disclosed but are estimated to be around $10 million per annum, Craigslist’s impact on the print media industry has been substantial – the company that reportedly
has little interest in maximizing profits
has destroyed $50 – $60 million per annum in newspaper classified advertising in the San Francisco Bay Area alone – money that companies and consumers now spend elsewhere.
It is not just the traditional print media and publishing sector that has been impacted by the emergence of digital entertainment. The advertising, film and television industries, sports, gaming and gambling industries and perhaps most notably the music industry, have all found themselves at the start of a wave of disruption. The introduction of paid downloads, creation of social interaction applications through “social networking”, and enabling technologies to allow mass sharing of user generated content has begun to significantly alter what we read, watch and listen to and how we consume these services.
Nielsen SoundScan reports a 20% fall in CD sales in the last 5 years, and although much hyped, online music sales have not been able to pick up the slack. Instead, other entertainment media such as online movies and gaming have picked up mind and wallet share. Latest forecasts today predict that digital music downloads from Apples’ iTunes service and other online DRM download sites will continue to be flat or decline. Though Apple and iPod are certainly overcited in digital entertainment articles, it is clear that Apple has been able to align technology, content, and markets – and control the alignment. In April 2007, Apple announced that 100 million iPods had been sold and 2.5 billion songs had been sold through the iTunes store. But let’s not be fooled: Apple is not in an as strong position as sheet music publisher were for nearly 500 years, but rather found its place in the capitalization of content by providing a platform and mediation for content, technology, and markets, selling iPods and increasing their sales of computers through brand awareness and increased lifestyle image. Music labels, movie studios, and television stations still control the content for the iTunes store.
Pay-per-view video on demand and video download portals also struggled with technology, infrastructure, broadband access, markets, and the Big Head – Long Tail conflict. Netflix realized the disconnect between content, market, and technologies early on. They also realized that with an unknown brand and limited resources they would not be able to resolve the issue in the near term. They decided to wait with an online offering and instead created a new blue ocean business model around an already aligned technology and business model: postal-based DVD rentals. They were well aware that they couldn’t compete with the attractiveness, shelf space, and brick-and-mortar presence of a Blockbuster, so they started to create a business model and platform that would address the Long Tail while controlling users and usage. Netflix’s CFO Barry McCarthy describes their alignment and control of content capitalization from their investor presentation in late 2005:
A couple of quarters ago [Blockbuster] said that about 70% of what they rent online is new releases and about 30% is back catalog. That’s not true in our business and it’s never been true in our business. The day we came public and in [Q4 2005] about 30% of what we rent are new releases and about 70% is back catalog – and it’s not because we have a different subscriber. It’s because we create demand for content and we help you find great movies that you’ll really like.
Netflix delivered over one billion DVDs since its service was launched in 1999, and showed how to use an aligned business model and control to successfully capitalize on content.
[Next post in series: The Digital Entertainment Evolution]
