Kostas Rossoglou & Svenn Richard Andersen
Music, movies, books and video games… all such cultural products are increasingly available through digital distribution. But unfortunately, as the new technology emerged, it was utilized first by pirates rather than rights-holders.
Throughout the past decades, the pirates have been battling the rights-holders (or rather their organizations), with accusations thrown back and forth. Consumers, caught in the middle, have often been forced to choose between the accessible and illegal, and the inaccessible and legal.
Fortunately, this is changing.
Norwaco, the Norwegian copyright organization, conducts annual surveys to establish how license fees should be redistributed to artists and rights-holders. Over the past few years, the findings have been quite remarkable.
From 2008 to 2009, the number of illegal copies of digital music made fell dramatically. Norwaco calculated that in 2008, about 22,300 pieces of music were copied illegally every week. A year later, that number was slashed to about 13,500. In 2010, the number fell once again.
Three interesting facts need pointing out. First, the number of legal copies purchased did not rise at the same speed. Second, no such trend could be identified among the other industries in the report (film, radio and TV). Third, no new enforcement rules were introduced during this period.
So what happened in the Norwegian music market from one year to the next? Legal music streaming was made more accessible.
Swedish music-streaming service Spotify was launched in October 2008. By offering both a subscription-based service and a free one (the latter being paid for through advertising), it provided an alternative to the legal and illegal downloading of single tracks or whole albums.
In the beginning, most customers preferred the free subscriptions. Yet, slowly but surely, the number of paying subscribers rose.
It might just be a coincidence that illegal downloading decreased in 2009, but a continuous decline was confirmed by Norwaco’s survey in 2010. Furthermore, the Norwegian branch of the International Federation of the Phonographic Industry (IFPI) is at long last painting a positive picture of the state of digital music.
IFPI’s sales statistics show that by the first quarter of last year, the total value of the digital market had surpassed that of the physical market.
And where do we see most of the growth? In the market for subscription-based music services. From June 2010 to June last year, the total value of digital music service subscriptions grew by 584 per cent. There was also significant growth in the value of purchased streams and legal downloads.
According to IFPI Norway, there is now, for the first time, reason to feel optimistic about the digital market. The industry is still losing revenue to illegal downloaders, but streaming services seem to be curbing the piracy.
The only way that paid-for services can compete with free ones is by being better. For many users, immediate access to a (seemingly) limitless catalogue of music via a quick search seems better than having to look up an illegal torrent file or locate a peer-to-peer copy of a track or album.
Movie and TV businesses will most likely experience many of the same problems the music industry has suffered since the introduction of the first file-sharing site for music, Napster, in 1999. Increasing bandwidth and growing computer literacy will make more consumers willing and able to search for film and TV content online.
Basing predictions of future revenue on developments in the retail-based DVD market will probably be futile, judging by experiences from the music industry. The case of Spotify, as well as similar services such as Deezer (France), Wimp (Norway) or Last.fm (Britain), shows that the way culture is consumed has changed. Business models should be based on customer demand and an understanding of what is technically feasible – not a desire to maintain existing models or cash flows. In other words, you need to adapt the map to the terrain – you cannot change the terrain to suit the map.
As for the book industry, a severe restructuring of the business is under way. Amazon digital-book sales surpassed sales of printed books last April. The second-largest bookstore chain in the United States, Borders, went bankrupt last July, largely owing to digital copies threatening its physical market. Coming up with attractive, legal offerings allowed Amazon and No. 1 US book retailer Barnes & Noble to become dominant when the market moved online.
One market often forgotten when talking about the digital business is the video-game industry. Digital distribution accounts for 32 per cent of video-game revenue (according to last year’s IFPI Digital Report, the figure is 39 per cent). The video-game industry has battled piracy since the late 1980s. In many respects, it was hit harder and earlier than the other industries. Still, it has continued to grow ever since.
We believe its success has been largely due to its willingness to provide reasonable business models and accompanying digital-rights management solutions, with a fair trade-off between limitations for use, access to extra material for legitimate gamers and attractive legal offerings.
The success of online-game service Steam proves that people are willing to pay for content online. Yes, gamers could probably download a free, pirated version of a game from a file-sharing website, but many choose to pay. Steam is estimated to have a 70 per cent share of a US$4 billion (S$5.1 billion) market.
From time to time, consumers have opposed new measures that they found intrusive. For instance, gamers have protested loudly against continuous connected verification for games that could be played offline. This suggests that consumers are willing to accept measures to limit piracy – as long as they are reasonable.
Very few oppose rights-holders’ interest in getting a return on their invested time, money or talent. But at the same time, no one likes to draw the short straw every single time.
Digitalization creates a great distribution channel for most artistic or cultural products, but merely having an opportunity does not guarantee success. Content providers, rights-holders and creators need to listen to the customer’s desires.
In the end, it is a matter of the consumer respecting the intellectual property of the rights-holder – but at the same time, the rights-holder has to respect the expectations and demands of a new generation of consumers.
The transition from a physical, retail-based market to one that is fully digital and truly global might hurt conventional business models. But repeating the same, invalid arguments (such as ‘no legal solution can compete with a free one’ or ‘digital will never replace the physical market’) over and over does not necessarily strengthen them.
We believe that all digital markets will grow. We believe that end users are willing to pay for good, legal alternatives. But the offerings have to be attractive enough for those who are paying. And they have to be effective.
The first writer is a senior legal officer at the European Consumers’ Organization based in Brussels and leads its digital team.
The second writer works with digital services for the Consumer Council of Norway’s policy department.
This article was first published in the Ericsson Business Review.
Reprinted courtesy of Straits Times Indonesia. To subscribe to Straits Times Indonesia and/or the Jakarta Globe call 021 2553 5055.