mediamax

Music Industry vs. Recording Industry

The popular opinion is that the music industry is in trouble, brought about by file-sharing and MP3s. However, in reality, the music industry is alive and kicking. More music is being created, more artists are being discovered and more music is being consumed in various forms and the hip-hop stars are very much on the Forbes' list

So, the music industry seems to be doing fine, but whats changed is the fortunes of the recording industry, at least the industry in its traditional form. Recording labels have traditionally offered two values --- promoting and marketing the artists & retailing and charging for the music. Today, it is not that hard for artists to communicate and promote themselves directly to the fans, via MySpace and others. So the value of the label's promotion/marketing is lesser. On the payments front, in addition to fans not paying, many artists themselves don't want their fans to pay for their music.

So how is money being made? From concerts, merchandising, guest appearances in other shows, branding, etc. Hip-hop stars like G-unit and 50cent are at the forefront of this trend, possibly helped by their younger, tech-savvy fan base.

The RIAA (representing the recording industry) is still suing people for piracy and promoting all sorts of other regulation. However, I think that that is a losing battle. The days of $20 CDs are long antiquated --- Tower Records went out of business two years back. Most of the music on iTunes and iPod are not paid for.

My suspicion is that the recording industry will change dramatically in the near future. They (and the RIAA) would stop suing people and instead start promoting file-sharing and other ways to get the music out there for free in as many ways as possible. They would make money and help the artists make money by selling services around the music and the artists  -- such as product placements in the lyrics, custom lyrics for events, clothing and lifestyle brands, and the managing concerts/events. There may still be money changing hands -- but it is more likely to be driven by some value-add around the process of the fan's acquiring the music track... such as additional metadata about the music, being able to connect with other fans of the artist or getting a custom mix of the track

In other words, access to plain-vanilla music is no longer a scarce commodity and hence it is tough to act as a gatekeeper for it. The industry has to invent other scarce commodities surrounding the music that they can control and hence extract rent. Ideas and tools for creating, controlling and monetizing such scarce commodities is where the future is.

Similar trends are being seen in the TV and movie industries and that is where startups like MediaMelon can help bring value to both the content owners and the end-consumers.

DVD rentals, and DVD Kiosks

While doing some research on DVD rentals, I came across the growing role that DVD Kiosks are playing in the market. DVD kiosks are DVD vending machines that rent out titles for around a $1 a day. The two main DVD Kiosk service providers are DVDPlay, a VC funded company, and Redbox, which is owned by McDonald's and Coinstar (CSTR).

I have not seen much of them, but apparently there are 10,000 such kiosks, typically at supermarkets, each generating $30-40K in annual sales. They are expected to garner 25% of DVD rentals by 2011, according to Bloomberg.

This is likely to represent another threat to Netflix/Blockbuster's traditional DVD-by-mail business model. DVD Kiosks would likely require much lower operating costs and capital, and offer convenient 24-hour access. The number of titles may be relatively limited at a kiosk, but that number should likely include the top hits that people are most likely to to be interested in

In addition, USPS said that they may charge a 17 cent surcharge on Netflix mailings, because their mails require special manual handling. This could potentially result in NFLX's operating income per subscriber to decline by 67%, from $1.05 to $0.35. I think that they will soon renegotiate the surcharge or redesign the offending aspects of their envelopes, so the impact may not end up being that drastic.

First year over year decline in DVD Sales

DVD sales decreased for the first time, year over year, in 2007. DVDs are the largest revenue generators for Hollywood. Factors contributing to this could include increasing popularity of VOD, online videos, and competition from other forms of entertainment such a video games.